Trauma Insurance Update PDF

CRITICAL ILLNESS INSURANCE
Mnchener Rck
Munich Re Group
CONTENTS
Critical illness insurance
1
2
3
4
5
6
7
8
9
10
11
1
2
3
4
5
6
7
8
9
Introduction
Part I: The product
The concept of CI insurance

Product design
Pricing
Medical underwriting of CI covers
Claims considerations
Reinsurance of CI covers
5
10
18
23
26
28
Part II: Recent developments and experience in selected markets
30
South Africa
United Kingdom
Canada
Australia
Southeast Asia
31
36
40
42
45
Final remarks
48
References and sources
50
Appendices
51
Specimen definitions
Deriving incidence rates
Sample crude incidence rates
Sample net premium rates
Specimen policy conditions
Checklist for the application form
Specimen claimants statement
Specimen physicians statement
Actual fraud case
52
54
58
59
62
64
65
67
69
INTRODUCTION
The rapid progress made in medical science and clinical examination methods during
recent years and decades means that doctors can diagnose and treat many life-threatening diseases much earlier nowadays. Thanks to such developments, many lives have
been saved.
However, the financial burden for the people affected and their families can still be
extremely painful. Many serious illnesses can only be cured using state-of-the-art and
highly expensive forms of therapy. Rehabilitation and the sudden changed circumstances
caused by serious illness also exact a high price.
Health insurance is dominated by the principle of cost reimbursement for medical treatment and rehabilitation. Patients are rarely free to choose their own doctor or form of
therapy, with only private insurers offering such an option. Health insurance thus only
partially covers the financial consequences of a serious illness and does not normally
address the problem of consequential costs for changed circumstances and rehabilitation.
As traditional life and disability insurance policies generally have a different focus, very
few insurers in the past were willing to cover the needs of the seriously ill. However, this
gap has been filled over the last twenty years or so, as a new form of cover has been
developed and established in many markets which provides for payment in the event of
a serious illness occurring. In this publication, such products are referred to as critical illness (CI) insurances.
This publication is divided into two parts:
Part I is intended to provide comprehensive product information on CI insurance. The
first chapter presents a general overview of the subject. Chapters 2 to 6 look at specific
aspects, such as underwriting and rating, related to product design.
Part II deals with recent developments in selected markets around the world.
The appendices include a collection of valuable product information such as
recommended CI definitions,
specimen policy conditions,
specimen claimants statement,
specimen physicians statement.
Furthermore, an illustration of how to derive a sound actuarial premium basis is given

and sample net premium rates are provided. The final appendix presents a real fraud
case from South Africa, pointing out that prudent product development and efficient
product management are of prime importance for companies involved in the CI market.
PART I
THE PRODUCT
1
THE CONCEPT OF
CI INSURANCE
1.1 INTRODUCTORY REMARKS
CI insurance first emerged in South Africa in 1983 and was known as dread disease insurance. However, such policies had been sold earlier in the USA and provided benefits for
certain types of cancer. These cancer policies are generally regarded as the pioneer
products of CI insurance. It did not take long for CI insurance to spread from South Africa
and nowadays it plays an important role in many markets throughout the world, particularly in the UK, Canada, Australia, South Africa, East Asia, and Israel.
CI covers pay an insurance benefit if the insured person suffers a serious condition
(depending on the definitions stipulated in the policy wording) such as
cancer,
heart attack (myocardial infarction),
stroke,
coronary artery (bypass) surgery,
kidney failure (renal failure).
The number of diseases covered varies considerably depending on the market and
provider concerned. Appendix 1 provides an overview of the most important insured diseases.
CI insurance covers against the financial consequences of a serious condition. People
affected are given financial support to enable them to better manage their changed
circumstances of life.
Besides the original South African term of dread disease insurance, many markets today
now refer to such cover as critical illness insurance, crisis cover, trauma cover or living
insurance. The reason for this is that the term dread disease is considered too drastic in
many markets and unsuitable for marketing purposes. Also, many CI products are no
longer restricted to cover of life-threatening diseases but provide financial protection
against a variety of critical situations. The survival character of this form of insurance
thus plays a more prominent role nowadays. As mentioned in the introduction, this
publication uses the term CI insurance to cover all of the above possibilities.
For some years now, a steady increase in the number of diseases covered under CI products has been observed in many countries. Many life insurers hope that extending cover
will help them gain a distinct advantage over more restrictive competitors.
CI covers are available in both individual and group business. In young insurance markets
in particular, group business initially often has greater significance than in more developed
markets. This publication deals primarily with individual CI business. The particular features
of group business (risk assessment, free cover limits, rating, various coverage options,
etc.) are not addressed in this publication.
1.2 MARKETING CONSIDERATIONS

CI insurance is suitable for people whose social insurance provides inadequate coverage
against the high costs that can arise in connection with a serious illness. This is frequently the case in countries which have limited state social security systems. However, even if
a comprehensive health system exists, many people who become seriously ill may want
to have the additional financial independence that allows them to afford the best medical
treatment (e.g. in a private clinic or abroad).
Additional burdens do not necessarily have to be connected with high medical costs. For
example, a seriously ill person may see his circumstances change to such an extent that
the house or apartment may have to be remodelled to meet the needs of disabled persons. Alternatively, it may suddenly be necessary to obtain a car in order to maintain
mobility. There are many circumstances which could trigger the need for additional
funds.
A serious illness may reduce a persons long-term ability to work. For this reason, the
benefits under a CI policy are also used to pay off debts from consumer credits or mortgages (credit life insurance).
The above arguments clearly show that there are close links between CI insurance, health
insurance and disability insurance. CI insurance should therefore be embedded in a comprehensive security concept for the client, who first has to undergo an individual needs
analysis. In this way, sales arguments can be presented in a convincing and professional
manner.
A more detailed approach to the principles of marketing CI insurance is provided in
Munich Res publication The Marketing of Critical Illness Insurance.
1.3 PRODUCT DESIGN

CI insurance usually takes the form of a rider offered in combination with a life policy.
The underlying or main policy may, for example, be a term or an endowment policy.
Stand-alone CI policies are offered in certain markets but have been of only minor importance to date.
A basic distinction has to be made between two types of CI insurance: The first and most
common form of cover provides only a prepayment on the sum insured of the underlying
policy (acceleration benefit). The second form provides for additional benefits without
affecting the life sum insured of the main policy (additional benefit). With traditional products the benefit under a CI policy is usually only paid out once, after which the insurers
liability ends.
There are increasing indications that in some countries health and accident insurances
are being extended to cover elements of CI insurance. Conversely, CI products increasingly include disability and long term care cover. Although this may appear logical, it is too
early to talk of a convergence of the various product lines.
In this connection, the general trend towards target group rates should be mentioned.
There are now tailor-made products, for example for women or young people, which are
specially designed for the insurance needs of the group concerned. For example, womens
products in Hong Kong are very popular. These policies offer not only life and health
cover but also insurance cover for specific critical illnesses, which focus cover on typical
womens illnesses such as breast cancer.
In addition to these coverage concepts, there are also other variations and options, which
will be dealt with in Chapter 2.
1.4 POLICY CONDITIONS

Each occurrence of a covered condition must be confirmed by a registered medical practitioner appointed by the insurance company. The diagnosis of critical illness must be
supported by clinical, radiological, histological and laboratory evidence acceptable to
the insurer. Apart from the normal exclusions applied in life insurance, self-inflicted
injury, alcohol or drugs abuse and diseases as a result of an HIV infection should also
be excluded.
Because of difficulties in obtaining medical evidence for a critical illness in some countries, the insurer should have the right for the purposes of claims assessment to send the
insured to a country which should be reasonably accessible for the insured.
In South Africa companies have experienced clear-cut cases of antiselection. For example,
persons suspecting the imminence of a serious illness have applied for a CI policy without having first sought medical diagnosis. Precautions against such antiselection include
a provision in the policy stipulating a waiting period. This waiting period can vary
according to the disease concerned, but is usually between two and six months. Insurance
cover only comes into effect after this waiting period has expired.
If the CI insurance provides for an additional benefit in the event of a critical illness, the
waiting period should be accompanied by a survival period. If a critical illness occurs, the
insured has to live until the end of the survival period before benefit is paid. Depending
on the illness, this survival period may only last two weeks, but a month is the standard
period.
1.5 MAXIMUM BENEFIT LEVELS

The sum insured should be appropriate to meet the expected financial needs in the event
of a critical illness. The general principle also applies here that the insured should not be
financially better off than before the CI occurred. A limitation of the sum insured also
helps to limit antiselection. This is one of the main reasons why the maximum permissible sums insured are lower than in life insurance. However, in case of key-person
covers, the benefit levels may be substantially higher.
1.6 AGE LIMITS

The maximum age at entry is frequently 55 years and the age at maturity is usually 65
years. However, this can vary from market to market. High ages at maturity are not recommended, as the statistical data for these ages are less reliable and greater variability of
claims from year to year would be expected.
Higher ages at maturity can be considered in the case of prepayment of a whole life or
endowment policy, as the sum at risk with such policies will be relatively low in the later
years. Moreover, it is likely that older people suffering from a critical illness will die in
direct consequence.
1.7 PRICING
Determining incidence rates is difficult for a number of reasons. In many countries there
is a lack of reliable statistical data which can be used for the purposes of rating, and geographic and socio-economic factors in different countries also affect the CI risk in different
ways. This results in a significant risk of error. There are also considerable uncertainties in
evaluating the risk of antiselection (moral hazard) and the positive effects of risk assessment.
Fundamental problems have to be tackled in the rating of CI covers. For example, the
rapid progress in medical and diagnostic science also significantly influences the incidence rates of various critical illnesses. If one takes cancer as an example, modern findings of cancer research make early detection of this serious disease a lot easier. This
inevitably leads to higher incidence rates of cancer.
Another example is the cover of coronary artery surgery. Less drastic and more efficient
treatment techniques allow surgery to be used more frequently than used to be the case.
This trend also means that statistical experience becomes out of date a lot sooner. All in
all, it should be noted that the actuarial bases for CI harbour a great risk of change.
These rating risks make it prudent not to grant premium guarantees lasting more than
five years. For the same reason, single-premium cover should only be offered with an
appropriately short policy period.
1.8 UNDERWRITING
CI is exposed to a high risk of antiselection:
Attaching a CI rider to a life insurance might lead to a significant increase in the
insurance premium.
Non-disclosure is easy.
As CI is a living benefit, people who feel particularly prone to the diseases covered
are more likely to apply for such insurance.
Consequently, application forms are more comprehensive than in life insurance and
contain standard questions on smoking habits and family history. The non-medical
examination limits are also different to those in life insurance and are set at a lower
level. Statements of attending physicians are very important if applicants request a sum
insured which is above the non-medical limits. The underwriter must also have a thorough knowledge of the diseases covered and be able to assess their interactive effects.
1.9 REINSURANCE
Given the risk involved in a CI product, many life insurers seek reinsurance support for
their CI portfolios. The risks of error and change are of major importance in this respect.
The predominant forms of reinsurance are quota share and surplus agreements with
retentions lower than in life reinsurance in order to reflect the greater factor of uncertainty involved with this product.
1.10 SUMMARY
In summary, it can be said that CI insurance constitutes a suitable addition to the range
of products offered by a life insurer. The success of this product is there for all to see.
Naturally, the different parameters in various markets and the specific interests of each
life insurer require individual product solutions. CI insurance offers a wide range of possibilities in this respect.
CI insurance is a complex and demanding product. The insurance conditions have to be
defined very carefully. Special care should be taken to ensure that the range of benefits is
presented to the insured in a transparent and easy-to-understand way. At the same time,
the medical definitions of illnesses must be of a high quality in order to guarantee objective assessment of claims. Efficient risk assessment and claims processing are also of
major importance in ensuring the success of a product . An example of an actual fraud
case from South Africa is provided in Appendix 9 in order to demonstrate the risk
involved when offering these living benefits.
2
PRODUCT DESIGN
2.1 TYPES OF COVER
CI covers may take a variety of forms, two main ones being distinguishable.
They can be characterized as follows.
Prepayment or acceleration benefit
The usual form is a rider to a life insurance policy providing for full or partial prepayment
of the death benefit in the event of a CI claim. The CI sum insured is then paid out as a
lump-sum benefit.
The amount of CI benefit is given as a percentage of the life sum insured. This percentage
is often 100% or 50%, but can also be fixed at any other value. As soon as the CI benefit
has been paid, the sum insured under the main policy is reduced by this amount and at
the same time the premiums to be paid decrease accordingly.
There are also life insurance policies which directly include CI cover (i.e. there is no CI
rider as a legally independent contract). However, CI covers are often linked to a life rider
and a prepayment for CI then refers to the sum insured of the life rider and not to the
underlying policy. An example of this is an endowment insurance which is extended by a
term and CI rider. If a critical illness occurs, a prepayment on the sum insured of the
(term) rider is made and the endowment policy continues. There are many variations here
and product developers make every use of them.
Additional payment or stand-alone benefit rider
In the event of a CI claim, an additional benefit is due, with the underlying main insurance
continuing unaltered. As a rule, the CI benefit is paid as a lump sum. However it is also
possible to arrange payment in three to five instalments. For such cover the insured must
survive a short period of time to trigger the claim (see survival period).
10
Worldwide, most CI products are still offered with a prepayment benefit in combination
with whole life, term or endowment insurances. However, each of the two main forms
has its special advantages.
a) Prepayment: The covered diseases of a CI insurance belong to the main causes of
death. Therefore, under a prepayment type of cover, a CI claim represents a benefit
which would most probably have had to be paid at a later time anyway. For this reason in particular, prepayment covers are less susceptible to incidence rates which are
set too low.
Another advantage is that the reserve of the main policy may be used to pay out the
CI benefit, as this reserve is released in the same proportion as the main insurance is
reduced. This item is of importance especially under endowment and whole life policies as substantial reserves are available here towards the end of the duration.
If the total life sum insured (e.g. only 50%) is not paid out under the prepayment
product, the insured is still covered for death following a CI claim.
b) Additional payment: If there is a demand for comprehensive provision for dependants,
it may be useful to have the whole sum insured maintained for death even after CI
benefits have been paid. Additional payment products do this. Besides, they have the
advantage that they can be bought in the form of modules to go with various types of
cover, possibly even subsequently.
The premiums under an additional payment product are affected by the duration of
the agreed survival periods. As a consequence, assessment of a claim becomes a
more tedious task.
A decision for or against a prepayment or additional payment solution should be made in
consideration of the actual insurance demand. In this context, it should be noted that the
inclusion of an additional payment benefit leads to higher premiums than the inclusion of
a prepayment cover.
Specimen policy conditions for a prepayment contract, together with the necessary
amendments required for an additional payment contract, are contained in Appendix 5.
In addition to these main forms, there are other types and options which, however, are
not yet of any major importance.
Stand-alone cover
This is a stand-alone CI cover which is not combined with any underlying life insurance.
Otherwise, benefits correspond to those under the additional payment product. However,
there are some complications.
If the insured dies from a CI within the survival period, no benefit is paid. This will be difficult to understand for the beneficiaries if the death is close to the end of the survival
period, as no separate death benefit becomes due. This may lead to client dissatisfaction
and a loss of image for the insurer.
11
Waiver of premium
As soon as a CI occurs, premium payment ceases under the underlying main insurance.
This type of cover may be a valuable extension to additional benefit policies and to those
prepayment policies granting only a partial payment of the life sum. Otherwise, the premiums for the main insurance would continue to become due after receipt of a CI benefit.
In order to calculate a waiver of premium cover on a sound actuarial basis, it is necessary
to assess the survival probability of the person suffering from a CI condition. However,
this usually fails due to the lack of reliable statistics which would permit a sound analysis
of the mortality of the seriously ill. This means that rough estimates will have to suffice
for pricing a waiver of premium cover.
Options
Reinstatement of CI cover
Since the end of the 1980s, additional payment products have been offered in South
Africa with the option to reinstate, after a CI claim, the cover for CIs not yet claimed (reinstatement of CI cover). If, for example, the insured has a myocardial infarction, he can be
granted insurance protection against cancer or organ transplantation. This cover, however, has been considered too expensive and has practically no significance today.
Reinstatement of life cover (or buy-back option)
If a prepayment policy is sold with a buy-back option, it is possible after a CI claim to
build up the death benefit gradually. For example, the conditions can be worded so that
the remaining life sum insured is reinstated by 25% of the prepaid sum after a survival
period of two years. After further years of survival, additional increases may be made in
the sum insured.
The advantage for the insured is that this option grants an additional cover at the conditions applying on writing the original policy. However, the current age is the basis for the
calculation of the premium for the reinstated life cover. The additional premium for this
option is around 10%, depending on the length of the agreed survival period. The additional expenses are normally not very high as many insureds affected by a CI die before
the end of the survival period and thus can not exercise the buy-back option.
Child and juvenile covers

Children and juveniles are now frequently included in their parents CI cover. This can be
offered as an automatic element of insurance cover or as an optional extra. The main difference is that automatic cover stipulates that all policyholders pay a minimal premium
for the child insurance element even if they do not have any children. The second option
requires policyholders to pay an additional premium for each child included in the cover.
For obvious reasons, the diseases covered under child and juvenile insurance (e.g.
meningitis, poliomyelitis) may differ from those in the adults policy.
12
2.2 DISEASES COVERED MEDICAL ASPECTS

In addition to marketing aspects, important factors of a CI product concept will be determined by technical and medical circumstances.
Underwriting and medical considerations make three basic conditions for the cover of a
CI necessary.
The CI definition must be sufficiently precise that the existence of a claim can be
reviewed objectively and clearly.
It must be possible to price the covered conditions on a sound statistical basis.
The CI product should as far as possible be immune against the risk of antiselection.
The first condition can be met by calling in medical experts. The problem of good disease
definitions is explained below, based on the example of heart attack (myocardial infarction).
a) The definition recommended by Munich Re is as follows:
The death of a portion of the heart muscle as a result of inadequate
blood supply to the relevant area.
The diagnosis for this will be evidenced by all of the following criteria:
a) a history of typical chest pain
b) new electrocardiogram changes
c) elevation of infarction-specific enzymes
Non-ST segment elevation myocardial infarction (NSTEMI) with elevation
of troponin I or T is excluded.
By measuring elevations of troponin the death of even 1 gram (!!) of the heart muscle
can be evidenced. Those events would not mean a substantial handicap to the patient,
but may nevertheless be called myocardial infarctions.
b) A definition accepted by Munich Re is as follows:
c) elevation of infarction-specific enzymes.
This definition is problematic as it may be debatable as to whether those NSTEMI are
covered or not. Reading this definition it could be argued that a NSTEMI is excluded
since the condition b) is not fulfilled (because there is no electrocardiogram change
of the ST segment). But to make clear to insureds what kind of infarcts are really
covered under their CI product and to avoid misunderstandings, definition i) is recommended.
13
c) The following definition is rejected by Munich Re as being inadequate:

b) new electrocardiogram changes.
This definition is unacceptable insofar as there are acute heart attacks accompanied by
short-term pain and ECG changes, but with no effect on the blood values. This would
mean that heart attacks which are not yet myocardial infarctions would be accepted as
claims.
Specimen definitions of the eleven most frequently covered CIs are contained in
Appendix 1.
2.3 DISEASES COVERED EXTENSION OF COVER

Besides checking possible CIs in respect of the above three basic conditions for coverage,
the insurer has to decide how many CIs a product should include. The insurer has to
select a basic cover (three to six CIs) or an extended one with 15 or even more CIs,
or something in between.
When coverage is only basic cover, e.g. for the Big Three (i.e. cancer, heart attack and
stroke), people tend not to be concerned about being covered for other conditions. When
the number of covered conditions is expanded from the Big Three, then people begin
to focus on what is missing from the policy.
Furthermore, the underwriting and claims handling of extended CI covers is more complicated and therefore more expensive for the insurer.
In particular, extending the cover to special surgeries (e.g. bypass surgery, angioplasty)
creates problems, because those CIs are to some extent elective. People with insurance
for such surgeries will be less reluctant to undergo that operation than others. Further, it
calls into question whether some of these CIs should be called critical conditions at all. If
it is not possible to launch a cover without such conditions, reducing the benefit for those
surgeries would be one possible solution to the problems.
Instead of extending the CI cover by more and more CIs, an alternative way to round up
the CI cover would be to include total and permanent disability (TPD) and/or loss of
independent existence (LIE) as benefit triggers.
TPD could be defined as the inability to ever perform any occupation. However, as
experience in the UK shows, such definitions are not readily understood by policyholders, leading to high declinature rates for TPD claims (above 50% in 1998).
LIE could be defined as the permanent inability to perform at least three of six activities of daily living, similar to the policy conditions of long term care insurance (LTC).
14
Also seen in some markets is the inclusion of terminal illness (TI) as a further coverage.
TI is defined as any condition that is expected to result in the death of the life insured
within a short period of time (6 or 12 months).
Where the TI benefit is part of an acceleration CI policy and is well defined, it may be a
suitable cover. The cost would not be significant given that the vast majority of predictable deaths result from cancer. The benefit cost (interest on early payment of sum
insured and some premium shortfall) will be small in relation to the sum insured as a
whole.
TI is not at all suitable with additional or stand-alone types of CI product, which are
designed as living benefits. In this case the TI cover would be a kind of additional death
cover. Even the stipulation of a survival period would involve problems, because it may
often be very difficult to determine when a terminal illness commenced.
2.4 INSURANCE TERMS AND CONDITIONS

Limited benefits
When CI covers were first introduced, only rather limited benefits were offered under the
rider. In South Africa, the CI sum insured was limited to SAR 25,000 or 25% of the life
sum insured at the beginning. At the time, this amount was the cost of a bypass operation in South Africa. In the course of time, maximum benefits substantially increased in
some markets. In the UK for example, current CI benefits can be up to 1m and even
more.
An insurance company intending to introduce a CI cover is recommended not to offer
excessive benefits. High covers should only be granted following careful financial underwriting prior to policy issue. In this context, not only existing covers under CI policies, but
also any other policies for disability, medical costs, etc. should be considered.
Reasonable maximum sums insured are in the range of US$ 200,000 and should not
exceed five times the insureds net annual income. As mentioned in Chapter 1, however,
the sums insured for a key-man cover may be markedly higher. Here the CI policy serves
to balance the financial disadvantages to a medium-size company arising from the fact
that a key employee falls ill with a CI. The benefits under the CI insurance are paid directly to the company.
Age limits
The risk of antiselection grows with increasing age at entry and cannot be completely
eliminated, not even by a complex risk underwriting process. Therefore, a maximum age
at entry of 55 years appears reasonable.
As a rule, CI covers end at age 65, due to the fact that upon reaching retirement age the
insured does not have to fear any loss of income in the event of a CI. At older ages, long
term care costs often arise from serious illnesses, and such costs can better be covered
under a long term care (LTC) insurance.
There are, however, also other, more technical reasons not to fix the age at maturity too
high. CIs are subject to a substantial risk of change in the course of time. As older people
15
run a higher risk of contracting a CI than younger ones, deterioration in the risk experience has a stronger effect on the result. In addition, the database for older ages is not
very broad, so that the CI risk cannot be assessed as reliably as for younger ages.
Nevertheless, some markets, e.g. the UK, offer CI covers even up to older ages at maturity. If the benefit is an acceleration of a life insurance benefit and the underlying basic
insurance is an endowment or a whole life policy, such covers may perhaps be justified,
as the sums at risk decrease at older ages owing to the savings character of the insurance. Moreover, many older people die from a CI, so that the high CI risk is balanced in
part by the death risk.
Waiting period
Taking South Africa as an example, Chapter 1 described the risk of antiselection. Early
claims in particular were often connected with non-disclosure in the proposal. However,
this problem has been tackled by introducing a waiting period. In the meantime, it has
become customary to agree on a waiting period at the inception of an insurance contract,
so that protection becomes effective at a later date. However, the insurance company
may abandon the application of the waiting period if the CI results directly from an accident.
This waiting period should in general not be shorter than three months. It is also conceivable to fix it differently for each disease, e.g. six months for cancer and multiple sclerosis
and two months for other CIs. However, marketing aspects make this difficult to enforce.
Survival period
For additional payment CI insurances, it is absolutely essential to agree on a survival
period. The survival period is the period after commencement of a critical illness,
during which the insurer is not yet liable to pay. This means that if the insured dies
within the survival period, no benefits under the CI insurance become due. As many
patients die within a few days after the first symptoms show, as is the case with myocardial infarction and stroke, the premiums required strongly depend on the survival
period selected. Furthermore, a survival period enables a sound claims review which is
sometimes impossible after the death of the insured. In this instance, an autopsy may be
required and this could upset relatives.
30 days is an appropriate and quite common minimum period, both from an actuarial and
marketing viewpoint. The survival period underlines the survival character of the CI cover
as a living benefit.
If, on the other hand, benefits are to be paid for medical expenses (surgery, chemotherapy, etc.), a survival period can hardly be stipulated, as insureds have to bear these costs
themselves at any rate even if they do not survive the survival period.
Here, a major medical expense (MME) cover would be more suitable. It would then be
combined with a CI insurance. Insureds can have the direct medical expenses covered by
the MME insurance and have the CI benefit to pay for their other financial burdens.
16
Assessment period
In practice, benefits are not paid until the claim has been properly reviewed. For example,
a neurological deficit of at least three months must be proved for a stroke, according to
the definition. Such a claim may thus be settled only three months after the event. If,
however, a permanent neurological disorder is proved before the end of the three-month
period, the insurer can pay the benefit earlier if the survival period is over. The assessment period is fixed separately for each illness, as laid down in the definitions of the CIs.
Exclusions
The following exclusions are customary for CI covers:
No amount shall be payable under this benefit if the relevant CI condition was caused
directly or indirectly by
attempted suicide or intentional self-inflicted injury by the life insured;
addiction to alcohol or drugs;
disease in the presence of an HIV infection.
If several CIs of an accidental character, e.g. loss of limbs, blindness, etc. or total permanent disability (TPD), are included, it is advisable to extend the list of exclusions to:
aviation,
hazardous sports and pastimes,
war and civil commotion.
17
3
PRICING
DERIVING INCIDENCE RATES
For quite some time, there have been claims analyses of CI portfolios (see Part II). However, the base data are not so comprehensive that incidence rates for insured lives could
be obtained. An initial indication of the different CI risk of insureds on the one hand and
the overall population on the other can currently only be derived, if at all, by drawing a
comparison between the claims cases observed and the claims figures expected on the
basis of population statistics.
As long as CI incidence rates cannot be deduced from the claims experience directly, they
will still essentially be determined in accordance with the system described below.
Incidence rates are calculated in several steps which basically have to be taken separately
for each illness to be covered.
Population rates
Population statistics on the incidence of each CI are taken as a basis. These statistics
should be broken down by sex and age or at least by age group. The CI definition underlying the statistics should of course conform to that of the policy.
First-ever adjustment
Many people have two or more myocardial infarctions in the course of their lives. CI
insurances, however, only cover the first infarction after commencement of the policy
and cease after that event. On the other hand, people who have already had an infarction
prior to insurance inception should be prevented from taking out a CI policy on the basis
of the medical risk assessment. This means that the actuarial CI calculation only has to
consider the actual first (first ever in a lifetime) infarction of a person the same
applies of course to other CIs.
Overlap of conditions
Often one and the same health impairment causes the occurrence of several CIs one after
the other. As the CI cover usually ceases after the first claim, such overlap effects must be
considered in the calculation of actuarial bases.
18
Again an example to clarify the situation: about every second patient undergoing a
bypass operation has had a myocardial infarction before. The incidence rate of a bypass
operation can therefore be reduced accordingly since, at least in standard products, benefits are paid only once.
Adjustment for insured portfolio
As far as insured lives are concerned, it is still very difficult in the case of CI covers to
estimate the extent of the effects of:
Medical selection
Substandard risks are filtered out at the underwriting stage and further insureds have
a lower risk because of a better standard of living; these effects are similar to those
known from life covers but perhaps to a different extent.
Antiselection
CI covers are more likely to be taken out by people who have particular reasons for suspecting that they will suffer from one of the diseases covered; the extent of this effect
will vary according to the type of CI cover chosen.
Moral hazard
The existence of insurance protection will probably increase the claims frequency,
which could especially be true for the cover of coronary artery surgery.
Mortality during the survival period
In pricing stand-alone benefits, the probability of dying during the survival period has to
be subtracted from the incidence rates for the disease, because the CI benefit is to be
paid out only to those who are still alive after that period.
Mortality after critical illness
In pricing acceleration benefits, the probability of the insured dying following a CI is used
to calculate the overlap of CI and death. By considering this overlap, the incidence rates
for the underlying life insurance could be reduced, as for all insureds who have received
a CI benefit, no death benefit of that amount becomes due in the event of death at a later
date. Instead of changing the actuarial bases of the main insurance, however, the overlap
is usually considered by granting a discount on the CI incidence rates.
The following graph is intended to further illustrate the situation.
IHx
Healthy lives
dHx
ISx
CI sufferers
dx
Dead
dSx
19
The overlap corresponds exactly to the number dSx of deaths among CI sufferers. However,
there are hardly any reliable statistics on the mortality of CI sufferers.
This is why in South Africa an approximation model was developed with the help of
which the cost of an acceleration benefit can be calculated. On the basis of this model,
the incidence rate for an acceleration product is approximately
Extra rate of CIACC over the mortality = ix kx qx

ix being the CI incidence rate without survival period (i.e. all deaths due to a CI must be
considered) and kx being the portion of deaths caused by a CI. These kx portions can be
deduced from cause-of-death statistics.
Smokers/non-smokers
The incidence of several CIs is strongly related to the smoking habits of the insured. For
example, about 90% of all lung cancers are related to smoking, but also the risk of heart
attack or stroke is about twice as high for smokers as for non-smokers. These ratios are
different for males and females and dependent on age.
Many markets have therefore established different rate tables for smokers and nonsmokers, implying the need to estimate the effect of smoking on the incidence rates.
These considerations will of course be equally relevant for insurers providing CI cover
on the basis of aggregate premium rates. The aggregate rates depend on the number of
smokers in the insured group. But antiselection could lead to higher than expected
smoker/non-smoker ratios in portfolios.
Trend
The population statistics used will be based on historical data. However, in order for them
to be utilized for current actuarial bases, they must be investigated for any improvement
or deterioration. For example, a trend in disease frequencies made visible with the help of
a time-series analysis must be incorporated.
In view of the above items, it becomes clear that careful deriving of actuarial bases represents a task that should not be underestimated. In this context, it will be a problem to find
adequate statistical material for actuarially using these items. Sometimes estimates or
assumptions will have to suffice.
Appendix 2 illustrates the above steps, taking cancer incidence rates for a stand-alone
rider in the UK as an example.
20
APPLICATION IN OTHER MARKETS

Unfortunately, not all the markets have as comprehensive data as described above.
Insurers are therefore often forced to transfer the results from one market the UK in
our example to another. In doing so, it is necessary to consider the differences between
one country and the other, if there are adequate reasons to do so, by making appropriate
adjustments. For better accuracy of the actuarial bases, local statistical data should of
course be procured and used wherever possible. If no reliable national statistics are available, actuarial bases from other markets may be transferred by comparing causes of
death. This, however, should be done only where there are no other possibilities. In particular, where standards of medical care are a key factor in the survival rates following a
CI event, differing standards of medical care between territories will have a major effect
on mortality rates following such an event. Using cause-of-death statistics in this situation
can result in incidence rates that are significantly different from the true underlying rates.
DIFFERENT RATES FOR MALES/FEMALES

As the incidence rates considered in Appendix 3 and the premiums listed in Appendix 4
indicate, both the level and the age structure of the incidence of critical illness experience
for females are quite different from those for males. There are a number of factors affecting the incidence such as the high frequency of breast cancers, which increases the cost
of providing CI insurance to younger females and the greater impact of cardiovascular
problems on the health of middle-aged and older males. Different premium tables should
therefore be developed for males and females.
DIFFERENT RATES FOR SMOKERS/NON-SMOKERS

As already mentioned, smoking habits definitely have a strong effect on the incidence
rates of many covered CIs such as cancer, myocardial infarction or bypass operations.
Therefore, the proposal form must ask about the type and degree of smoking (see
Appendix 6) in order to filter out heavy smokers and charge an adequate smoker loading
on the basis of the medical underwriting.
Non-disclosure of smoker status seems to be a common problem. The statistics suggest
that the proportion of smoker policies is much lower than in the overall population. If
non-disclosure is detected, many life insurers only scale down the benefit level according
to the respective smoker premium rate. Such a procedure gives a clear incentive to nondisclosure of smoker status.
SUBSTANDARD RISKS
Loadings are required if applicants are classified as substandard CI risks due to poor
health conditions, hazardous professions or other relevant factors. In this context, it may
well be commensurate with a risk to fix loadings that are different from those for the
death or disability risk.
In the event of especially serious impairments, a CI cover cannot be granted. Further
details of underwriting are described in Chapter 4 of this brochure.
21
RESERVES
For CI policies running for longer than one year, reserves for future claims payments
must be set up. As a rule, such reserves are calculated for each policy in accordance with
formulae corresponding to those for the mortality reserves. In addition to such individual
actuarial reserves, further reserves are recommended to cover claims fluctuations and any
deterioration tendencies of the CI risk. If business with long-term premium guarantees is
concerned, even more emphasis must of course be put on the long-term performance of
contracts. Careful observation of actual claims paid and subsequent adjustments of the
reserves are indispensable.
PREMIUM GUARANTEES
The future claims experience may change with new diagnostic procedures and improved
surgical methods. For example, obligatory cancer examinations for females could increase
the CI claims frequency owing to earlier detection, whereas the total mortality might
decrease. Likewise, changes in lifestyle could have a significant influence. Future CI
claims experience is therefore subject to a high degree of uncertainty.
Medical progress, changes in conditions and habits of living will continue to make the
CI risk change constantly.
Therefore, it is recommended not to guarantee premium rates on a long-term basis. If
experience shows that the pricing bases are inadequate for a particular market, it will
certainly be helpful to be able to adjust the premium rates, even for business in force. For
the same reason, cover of the CI risk should be granted very restrictively in return for a
single premium, as in such cases adjustments on the premium or benefit side cannot be
implemented.
The question of premium guarantees must also be seen in the context of the safety loadings in the actuarial bases. For long-term guarantees, substantially higher safety loadings
are required than for short-term covers such as yearly renewable term insurances.
22
4
MEDICAL UNDERWRITING OF CI COVERS
4.1 INTRODUCTORY REMARKS
With the critical illness product new ground has been broken in medical underwriting.
Experience with life and disability insurance is only of limited use, since when assessing
these risks a critical illness is regarded only as one possible event that may lead to death
or disability. Health insurers sometimes do cover selected diseases but may have
acquired different experience in comparison to life insurers covering critical illness.
There are apparently a number of special risk factors which can increase the incidence of
a critical illness. These risk factors are primarily related to the circulatory, cardio- and
cerebrovascular systems. Smoking as a risk factor not only inflicts damage upon these
systems, but is also known to induce several types of cancer.
Thus, insurers must have the chance to examine these special risk factors in the underwriting process in addition to reviewing the applicants family and individual medical history, and they must have an underwriting concept for weighting these disease-causing
parameters.
The knowledge which medical doctors of insurance companies have gathered on rating
substandard risks in life insurance in the course of many decades has led them to the
conclusion that critical illness covers can be offered to applicants with low to medium
extra mortality if the life rating is not a result of the basic diseases to be covered under
critical illness. The Framingham Heart Study shows that the probability of risk factors
developing into the actual disease is limited, which means that, despite the existence of
such factors among a number of applicants, critical illness cover can still be offered subject to adequate risk compensation in the form of an extra premium.
Establishing the life insurance rating is the first step in drafting Munich Res underwriting
concept for critical illness. Next, this concept provides a graduated system for evaluating
special risk factors for critical illness.
23
4.2 GUIDELINES
Initially, the total mortality of a risk is determined on the basis of the Life Underwriting
Manual. Only standard risks and substandard risks with up to a medium rating are considered for critical illness underwriting. Risks with a high extra mortality and those to be
declined for life insurance coverage are not regarded as acceptable for critical illness.
In a second step, the risks to be considered are analysed and evaluated with regard to
their specific critical illness risk. The risk factors of significance here are:
Major risk factors
Diabetes mellitus
Hypertension
Hypercholesterolemia
Smoking
Metabolic syndrome
Unfavourable features in family history
Minor risk factors
Overweight
Hypertriglyceridemia with low HDL
Elevation of lipoprotein (a)
Hyperuricemia
Hyperfibrinogenemia
Alcohol abuse
Lack of exercise
Health-impairing occupation
Every risk factor is assigned additional percentage debit points on the basis of its severity.
If applicants total percentage debit points exceed a given limit, they will be declined for
critical illness cover.
4.3 IMPAIRMENTS TO BE DECLINED

In addition to the major and minor risk factors outlined, there are special clinical pictures
which more frequently lead to critical illness, and applicants who suffer from these
impairments are not considered for critical illness cover:
24
Coronary artery disease

Diabetes mellitus type I
Arteriosclerosis
Peripheral vascular disease
These diseases can lead to heart attack (myocardial infarction), coronary artery (bypass)
surgery, stroke or kidney failure (renal failure):
Chronic severe
Chronic severe
Chronic severe
Chronic severe
Chronic severe
HIV infection
diseases of the hematological system

diseases of the liver and the gastrointestinal tract
diseases of the respiratory tract
diseases of the kidneys and the urinary tract
neurological and psychiatric diseases
Some of these diseases may include a certain tumour risk or develop towards the necessity of an organ transplantation.
Of course, a medical history of a disease covered by the critical illness benefit would be a
compelling reason to decline an application.
4.4 UNDERWRITING INFORMATION

The market in each country must determine which examinations are required for which
critical illness sums insured.
In general, comprehensive application forms should be used. The life insurance companys usual application form may require some amendments to make sure that all information relevant to critical illness can be easily obtained from the form. Appendix 6
includes a list which will enable companies to review their present application form and
to determine whether any questions for important critical illness factors are missing.
It is obvious that a report from the applicants medical attendant is a most valuable
source of information in properly assessing the critical illness covered, especially in cases
where the application form received does not fully satisfy the underwriter.
For group critical illness covers a free cover limit may be considered only for larger
groups. It should be fixed, however, at a lower level than in group life insurance and
accompanied by a pre-existing conditions clause to provide for the exclusion of cover for
critical illnesses suffered prior to the entry into the scheme.
25
5
CLAIMS
CONSIDERATIONS
Experience gained in the markets in which critical illness covers have been sold for some
time has demonstrated that broad and unclear policy definitions, non-disclosure by applicants and lenient underwriting and claims handling on the part of the insurers have led to
many problems. It is evident that all departments concerned (actuarial, underwriting, marketing, claims and legal) should be involved in the development and introduction of a critical illness cover in order to achieve the following:
The critical illness definitions used are such that disputes about what is covered are
kept to a minimum.
The policy wordings clearly indicate how and when the claimant should inform the
company. Normally, this would require that a claim be submitted in writing as soon as
practicable, but in any case within three months of the occurrence of a critical illness.
Following claim notification, the claimant should be required to provide full details of
the circumstances and for this purpose, a claim form on the lines of the specimen in Appendix 7 should be used to enable the company to take the necessary steps to ensure
that the claim can be settled quickly.
It should be stipulated in the policy wording that the company, prior to any claim payment, has the right to ask for all evidence relevant to the claim situation as well as confirmation of the insureds health on the date of inception of the policy. In addition, the
company should have the right to request the claimant to undergo an examination by
any doctor chosen by the company.
As non-disclosure has been and still is a cause for serious concerns in critical illness business, the claimants own medical attendant may play an important role at the claim stage.
A specimen of such a report is shown in Appendix 8.
Bearing in mind the complex nature of the critical illnesses covered, it is strongly recommended that in the event of a claim the company insists on full clinical, radiological,
histological and laboratory evidence:
26
a) Cancer
As an example, in the case of a claim it would be necessary to have a copy of the
histological report to ensure that the disease falls under the definition in the policy
conditions. This report should ideally provide details about the tumour in accordance
with the International TNM Classification of Tumours.
b) Heart attack (myocardial infarction)
In this case, for the purpose of claims assessment access to all current and recent
ECGs, a hospital report (and/or a report from the doctor consulted) as well as laboratory values would be essential. Should the evidence submitted reveal that the medical
authorities have been unable to establish the three criteria laid down in the policy conditions, the claim would not be admitted.
c) Stroke
Again clinical evidence must be available to ensure that, at the date of onset, there
was neurological deficit lasting more than 24 hours and that, three months after the
stroke, there are still neurological sequelae.
d) Coronary artery (bypass) surgery
As the definition requires that the need for such surgical intervention must be proven
by a coronary angiography, a copy of the angiography report in addition to the operation report would be required to support a claim.
e) Kidney failure (renal failure)
In this case, it would be necessary to provide a medical report with laboratory data of
renal function (e.g. creatinine, creatinine clearance, urinalysis) and a confirmation that
regular dialysis (hemodialysis or peritoneal dialysis) is carried out.
More detailed information on claims handling is provided in Munich Res publication
Claims Life and ancillary benefits.
27
6
REINSURANCE OF
CI COVERS
As described in Chapter 1, the risks of error and change are far greater in CI insurance
than in traditional life insurance. Through quota share or surplus reinsurance, a reinsurer
can assume a portion of these risks and therefore reduce the financial uncertainty faced
by the direct writing company. Reinsurance can be carried out on the basis of original
terms or risk premium.
The following aspects should be considered for the reinsurance of CI insurance:
Due to the many imponderables in the actuarial bases and the difficulties in reliably
quantifying the moral hazard, the possibility of adjusting premiums should be provided
for if the loss experience proves to be worse then predicted. Insurers and reinsurers
should therefore avoid premium guarantees lasting more than five years. If the insurer
increases premiums, the reinsurer should automatically participate proportionally in
these increases.
Reinsurance is often used by insurers to reduce their exposure to CI business where
they may have little or no experience. For this reason, small life insurers in particular
choose lower retention limits for their CI risks than for their pure life risk in order to
protect their solvency position.
If the CI insurance is a prepayment cover, the insurer and reinsurer should participate
both in the life and CI risk in the same proportion, as otherwise a dubious claim could
create a problem between the insurer and the reinsurer. For example, if a claimant dies
shortly after a heart disease, it may not be clear whether the insured suffered from a CI
condition valid under the policy stipulations. If insurer and reinsurer do not share both
the life and CI risk in the same proportion, the parties have a financial incentive to make
the claim either a death claim or a CI claim, since the amount of loss faced by each
party will depend on the cause of the claim. The loss, whether as a result of death or CI,
should affect the insurer and the reinsurer equally.
This can easily be achieved with a quota share reinsurance agreement. For example,
the insurer might reinsure 30% of its life and prepayment CI business. In case of a
28
reinsured policy with US$ 200,000 life sum insured and a CI acceleration benefit of 50%,
the reinsurer would pay US$ 30,000 (30% of 50% of US$ 200,000) upon CI and another
US$ 30,000 (30% of [US$ 200,000US$ 100,000]) on subsequent death, or US$ 60,000
(30% of US$ 200,000) if death occurs first. This example can be illustrated as follows:
Death claim with prior CI claim
Death claim without prior CI claim
250,000
250,000
200,000
200,000
150,000
150,000
100,000
100,000
50,000
50,000
0
Total
Insurer
Reinsurer
Life
Total
Insurer
Reinsurer
Life
CI prepayment
If the reinsurance is carried out on a surplus basis, it is advisable to fix only a retention
for the life risk. The CI risk should then be reinsured in the same proportion as the corresponding life risk. For example, the insurer might want to retain all life risks up to an
amount of US$ 50,000. A policy with US$ 200,000 life sum insured and 50% prepayment
in the case of CI would be reinsured as follows:
The excess of US$ 150,000 over the life risk retention, i.e. 75% of the total sum, will be
assumed by the reinsurer. The CI risk would be reinsured in the same proportion. In the
case of a CI claim, the reinsurer pays US$ 75,000 (75% of 50% of US$ 200,000) and
another US$ 75,000 (75% of [US$ 200,000US$ 100,000]) on subsequent death, or
US$ 150,000 (75% of US$ 200,000) if death occurs first. The illustration of this example
is as follows:
Death claim with prior CI claim
Death claim without prior CI claim
250,000
250,000
200,000
200,000
150,000
150,000
100,000
100,000
50,000
50,000
0
Total
Life
Insurer
Total
Reinsurer
Insurer
Reinsurer
Life
CI prepayment
29
PART II
RECENT DEVELOPMENTS
AND EXPERIENCE IN
SELECTED MARKETS
30
The concept of critical illness insurance
7
SOUTH AFRICA
Developments
Since the introduction of the first CI cover in South Africa in 1983, the product has developed there very quickly.
Owing to the unfavourable claims experience in the first few years, attention first focused
on the development of stricter insurance conditions and better underwriting. For example, several definitions were reviewed, as they had not explicitly excluded unjustified
claims for benefits. The definitions of the second generation were much stricter and more
detailed, so that both agents and insureds understood the scope of cover much better.
This led to the percentage of rejected claims for benefits being reduced considerably.
At the same time, further illnesses were included in the list of diseases covered. In the
first few years, only four or five critical illnesses were insured, but as early as in the late
1980s, more than 20 illnesses and operations were covered under CI.
After great initial sales successes, the percentage of policies where CI is included is
declining markedly in South Africa. Whereas in the late 1980s approx. 60% of all life
insurances were combined with a CI rider, the percentage is now around 25%. The main
reason for this is that in South Africa major medical expense policies (MME) are increasingly taken out as additional benefits to cover health costs. MME can close the gaps in
the national healthcare system much better than CI insurance. An MME cover is less
expensive and protects the insured against more events. Moreover, it can also be offered
as a family cover.
This trend, however, could be reversed if MME covers may only be sold within the framework of health insurance, a topic currently under discussion in South Africa. In that case
life insurers might be forced to sell more CI covers as riders.
Another problem in the first few years after the introduction of the CI cover in South
Africa was the large number of claims filed very soon after the inception of policies. As
the majority of these early claims were for cancer and multiple sclerosis, it is assumed
that many insureds took out a policy after diagnosing the illness themselves. Underwriting was apparently unable to detect these previous illnesses and to reject the respective proposals. This is why some policy conditions included a so-called waiting period
(moratorium clause) which excluded benefits in the first few months. The most common
moratorium periods are three and six months and are sometimes only applied to special
illnesses such as cancer and multiple sclerosis.
31
In order to narrow the gaps in cover after the occurrence of a CI, two options were introduced with very differing success.
Under a reinstatement of CI cover, it is possible to maintain benefits under a stand-alone
cover after the occurrence of a CI (see Chapter 2). This means that the CI policy only ends
at death or policy expiry, but not owing to the occurrence of an illness and the associated
payment of benefits. As continuation of the full CI cover would be too expensive due to
the subsequently substantially higher risk, only a sectorial cover is offered that has no
causal connection with the first CI. The reason for this is that, for example, after a heart
attack a second attack or a bypass operation is very probable. However, the risk of cancer
after a preceding heart attack is not significantly higher than for a healthy person, so that
this section may continue to be offered. This cover, however, was felt to be too expensive, and it did not meet the needs of the insureds. It seems relatively clear that what a
heart attack patient fears most is a second attack and not cancer. This also was the reason
why this option was only moderately successful.
Under a reinstatement of life cover option (also called buy-back option), the insured can
reinstate the life cover used up by a CI acceleration benefit after an extended survival
period (in general more than a year) fully or in steps over several years (see Chapter 2).
As even today stand-alone covers are rarely sold in South Africa, this option gives the
insured a chance of reviving the life cover and of building up the necessary death cover
for dependants, even after the occurrence of a CI. Another advantage for the insured is
that this product is much less expensive than a stand-alone cover thanks to the survival
period between the occurrence of a CI and the earliest point in time the option can be
exercised.
Under a life plus stand-alone CI rider, the occurrence of a CI and the subsequent death
of the insured may have two different outcomes: If the insured dies within the survival
period (normally 30 days), only a death benefit is paid out and the policy will terminate.
Should the insured live beyond the survival period, the CI rider benefit plus a death benefit will be paid out (if the death occurs within the coverage period). Thus, surviving an
extra day can result in a significant increase in benefits paid. For this reason, a reinstatement option may come much closer to the insureds needs. Nowadays, this option is
offered very successfully in South Africa under nearly all products.
The most recent developments in South Africa still tend towards the inclusion of more
and more illnesses. However, the public will only purchase products which cover illnesses
that are of a particular concern to them.
Scaled benefits (also called tiered or staggered benefits) are a very recent development.
By extending the scope of cover to an increasing number of illnesses, more and more
benefits may be payable on the occurrence of events that are not particularly serious. In
order to reduce benefits that are not commensurate with the risk, insurers increasingly
define benefits as a function of the seriousness of the illness.
32
Example of scaled benefits sectorial cover only for coronary heart diseases
Heart attack
Heart valve replacement
Valvulotomy
Valvuloplasty
Coronary angioplasty
Coronary bypass surgery
Surgery to/of the aorta
100%
50%
10%
10%
5%
60%
50%
This means that the insurance conditions include a list clearly showing the benefit in percent of the initial sum insured allocated to the illness/operation involved. The insured of
course still has cover for the remainder of the sum insured for other CIs. This means,
however, that the insurer never pays more than 100% of the benefit. According to the
above list, only 5% of the benefit would be due for an angioplasty, so that a subsequent
heart attack would trigger 95% of the initial sum. The subsequent premium which continues to be due by the insured after partial benefits have been paid is reduced in the
same proportion as the sum insured.
On the one hand, this partial benefit protects the insured from fully utilizing the cover for
a minor operation. Otherwise, in the event of a subsequent more serious illness, the
cover would already have been used up. On the other hand, this approach may substantially reduce both the insurers costs and thus also the premiums. In particular, the steep
increase in heart and related operations forces insurers to word their future products in
such a manner that they dispense with such triggers altogether or reduce the effect as far
as possible by reducing the benefits.
Disadvantages result exclusively from the larger amount of administrative work due to
the adjustment of the sum insured and the follow-up premium. However, this approach
moves the CI cover more and more in the direction of a health cover, as the sums
involved are fixed as a function of the seriousness of the illness and thus also of the
expected cost of medical care. The discussion of whether CI covers may be sold as products of life or health insurance is therefore becoming increasingly topical.
33
Experience
1994 studies of the causes of critical illnesses in South Africa show that there have been
marked changes since the first evaluations of 1984.
1984
1994
8%
9%
10%
12%
5%
37%
29%
53%
39%
Cancer
Cancer
Heart attack
Heart attack
Bypass
Bypass
Renal failure and stroke
Renal failure and stroke

Others
By means of stricter underwriting and improved definitions, the proportion of benefits

paid for heart attacks was substantially reduced in the period from 1984 to 1994. It is also
striking that the proportion of benefits for cancer in 1994 is excessive as compared to the
population figures. Apparently, the influence of selection depends on the respective illness.
In 1997, the Actuarial Society of South Africa conducted the first detailed study of CI
claims (Continuous Statistical Investigations Committee: Dread Disease Investigation
1991 to 1994).
Only three companies with a total of 880 claims in the period from 1991 to 1994 took part
in the study. Due to the incomplete information available, it was impossible to analyse
the claims by cause or smoker status.
Claims experience 1991 to 1994:
Males
Age
2024
2529
3034
3539
4044
4549
5054
5559
34
Females
Claims
Exposure
Rate in
Claims
Exposure
Rate in
19
50
92
151
207
168
129
54
95,829
164,957
162,655
126,536
85,964
48,989
21,761
6,119
0.20
0.30
0.57
1.19
2.41
3.43
5.93
8.82
9
28
37
51
57
39
19
9
72,715
108,497
94,591
69,596
42,993
22,963
9,264
2,450
0.12
0.26
0.39
0.73
1.33
1.70
2.05
3.67
Medical/non-medical: This study was unable to confirm the experience of the 1980s, i.e.
that the policies with medical underwriting showed substantially better claims ratios than
the non-medical policies. On the contrary, the non-medical policies were markedly better
than the medical ones.
Selection: As expected, the effect of initial selection is clearly visible. The claims ratio for
males in the first policy year is about 70% of the claims ratio of policies older than one
year. For females, the ratio is similar.
Sum insured: There is a clear influence of the amount of sum insured on the claims ratio
of both males and females. For sums insured below SAR 100,000, the claims ratio for
males is around 85% (with females 93%) of the claims ratio under policies with sums
insured exceeding SAR 100,000.
35
8
UNITED KINGDOM
Developments
CI policies have been sold in the United Kingdom since the mid-1980s. After initial difficulties, these products from South Africa became a great success and became the bestsold life covers in the 1990s. In 1999, more than 800,000 individual life CI policies were
taken out, and the portfolio thus increased to some three million. Seen statistically, 10%
of the working population had CI insurance in 1999. CI products are thus more successful
than traditional income-protection products.
In 1998, new CI insurances under individual life regular premium business amounted to
23.6%, 86% of these prepayment and 14% additional payment policies. Prepayment insurances are typically taken out together with endowment, term or whole life policies and
usually grant a prepayment of 100% of the sum insured.
Types of CI covers in the UK (1998 new business)
2%
12%
23%
Mortgage-related stand-alone
Non-mortgage stand-alone
Non-mortgage accelerated
63%
Mortgage-related accelerated
The mortgage business proved to be a particular growth factor. In 1998, more than 40%
of all mortgage-related policies were written with CI prepayment covers to secure loans,
either as mortgage endowment or mortgage-reducing term insurances. All in all, twothirds of the 1998 CI business was written in connection with a mortgage.
At the beginning, only six illnesses were covered in the UK: cancer, heart attack, stroke,
coronary artery bypass graft, kidney failure and major organ transplant. In the meantime,
36
the number (now more than 30) of covered conditions has also been extended considerably in the UK. It should be noted, however, that this trend is slowly coming to an end.
Today there are two product classes: the so-called basic covers for six to ten illnesses and
the comprehensive/extended covers for up to 30 or even more illnesses. In addition, most
CI covers include total and permanent disability (TPD)
as a catch-all.
In 1999, the Association of British Insurers (ABI) developed a Statement of Best Practice
for CI Cover including
Model definitions of the most important illnesses
Model wordings for suitable exclusion clauses
For TPD, there are no model definitions yet as the market participants have gone different
ways in defining the insured event. However, it can be observed that the main development is towards basing the TPD definition on more objective criteria, using activities of
daily living (ADLs) and functional ability tests.
The increasing standardization of insurance conditions has led to more market transparency and has strengthened in particular the market of independent financial advisers
(IFA).
The introduction of options for the reinstatement of life or CI covers after a claim (see
Chapter 2 or 7) is still in its initial stage in the UK and has not yet been very successful.
Some companies have started to combine CI covers with income-protection products,
which have been conceived for the mortgage market and include cover against unemployment. In the event of extensive illness or unemployment, the insurer pays the
instalments of the loan. If the insured suffers from a CI, the insurer redeems the outstanding loan by means of a single payment.
Premium guarantees have become more common recently. Usually, one would expect
premium rates to increase if such a guarantee is granted. Surprisingly, in the last ten
years the premium rates for CI products have decreased considerably. Currently, a Healthcare Study Group for Guarantees is investigating the effect of premium guarantees on
reserve requirements and is trying to develop new standards for the rating of CI products.
Experience
In March 2000, the Critical Illness Healthcare Study Group published its report entitled A
Critical Review.
This report evaluates for the first time the CI business experience of the entire UK market.
Data of 32 companies from 1991 to 1997 were investigated, i.e. approx. 60% of all CI
claims in the UK in that period. This study correlates exactly 5,536 benefit payments to
3.5 million policy years.
37
For acceleration business, the following claims rates (per policy) result:
Males
Age band
30
3140
4150
5160
61+
Females
Claims
Exposure
156
546
814
659
105
434,294
768,303
429,929
129,564
8,748
Rate in
0.36
0.71
1.89
5.09
12.00
Claims
Exposure
149
442
506
226
19
440,291
622,999
300,371
74,145
3,502
Rate in
0.34
0.71
1.68
3.05
5.43
Causes of CI: Whereas with males approx. 42% of benefits are paid for cancer
and 30% for heart attack, the majority of benefits for females are paid for cancer (75%).
Strokes and TPD claims are similarly frequent with males and females
(TPD approx. 6% and stroke approx. 7 to 8%).
Male
Female
2% 6%
8%
30%
7%
1%
6%
6%
10%
7%
75%
42%
Cancer
Cancer
Heart attack
Heart attack
Stroke
Stroke
Bypass
Bypass
TPD
TPD
Others
Others
Smokers/non-smokers: The ratio of experience rates of smokers to non-smokers is

around 150% for males and 137% for females. However, this ratio heavily depends on
age. Whereas the risk of smokers in the age band up to 30 years is only about 25% higher,
the extra risk in the age band over 60 years is around 70%.
According to a separate study for the period 1991 to 1995, the ratio for males was around
135% and for females approx. 120%. This indicates that the ratio of smoker to non-smoker
morbidity will probably continue to deteriorate.
Selection: Although in the UK only few policy conditions have so far included a waiting
period, a marked selection effect can be seen in the first policy years. For example, the
claims ratio of males in the first policy year is only 59% of that of policy year 3 and following. Due to a lack of experience with durations of more than two years, nothing can
yet be said about the actual selection period with CI covers.
38
Stand-alone experience: The results of the stand-alone products do not greatly differ from
those of acceleration business. Reasons may be that on the one hand stand-alone policies
have not been offered in the UK for a long time and there are thus many more policies in
the selection phase than is the case with acceleration business. On the other hand, the
available exposure is substantially lower than with acceleration covers, so that the statistical evaluations are less reliable. The following table (per policy) illustrates this fact.
Acceleration
Stand-alone
Claims
5,074
462
Exposure
3,281,875
359,108
39
9
CANADA
Developments
CI insurance, in its current form, is relatively new in Canada, having been first introduced
in 1993. Canadian CI sales have developed slowly since introduction. However, the industry has picked up dramatically in the last couple of years. In addition, banks are starting to
enter the market by offering creditor CI (e.g. mortgages, loans and credit cards). Banks
are hopeful that creditor CI will follow the same pattern as most of their creditor business,
i.e. become a major source of revenue and profit.
Over 40% of all individual CI policies in force were purchased in 1999. This trend is
expected to continue with more and more companies (insurers and banks) entering the
market and with more and more people becoming aware of CI insurance. In addition, the
group market, i.e. creditor, employers and affinity, is emerging and is viewed as a market
with major potential. The importance of CI insurance in the Canadian market is growing
rapidly. The main reasons are Canadas ageing population and rising healthcare costs.
CI insurance was first introduced as a stand-alone plan. It did not take long until it was
added as a rider to disability and/or life insurance. Currently, insurers are experimenting
with a more integrated approach such as accelerating the death benefit of a life insurance
policy upon diagnosis of a critical illness. Others are offering a limited amount of CI coverage on a guaranteed-issue basis.
There are different forms of return-of-premium (ROP) benefits on CI policies that insurers
use to distinguish themselves from competitors. Most CI polices in Canada have an ROP
as a death benefit built into their policies or offered as a rider. Others offer an ROP as
maturity benefit refunding the premiums upon maturity if there was no CI claim. Some
companies have introduced an ROP on lapse, giving policyholders the choice of terminating their policies at a certain point (e.g. after ten years or at age 65) and receiving a refund
of premiums. Although the policyholder receives a benefit for choosing this option, some
view this feature as morally wrong because the insurer is in effect encouraging policyholders to have their covers lapse.
The most significant trend could be creditor CI insurance (in particular CI insurance as
mortgage protection). Creditor insurance was first introduced in 1997 and has experienced
steep growth in Canada in the last couple of years. By the end of 2000, annualized
40
premium revenue of creditor CI insurance reached about Can$ 12m, which represents a
100% increase in total premium volume since 1997.
Insurers continue to cover more and more illnesses in their products in order to compete
effectively. When individual CI insurance was first introduced in the Canadian market,
the policies covered around ten conditions. Today, most policies cover 15 to 20 critical
illnesses.
The group market however, has been exhibiting a different trend. Here, fewer qualifying
conditions with fewer exclusions are seen to be advantageous. Typically in creditor CI
insurance, the three major illnesses are covered only, i.e. cancer, heart attack and stroke.
Limiting the covered conditions to the three common illnesses simplifies the communication material, allows for easier explanation and presentation, and requires less underwriting and fewer additional exclusions as compared to a product covering 10 to 20 illnesses.
There are a number of aspects to bear in mind regarding CI insurance in Canada as compared to the other more mature markets (e.g. UK and South Africa).
Firstly, in Canada the premium rates for individual CI products (i.e. not employers, association, group or creditor CI) are guaranteed for the life of the policy (i.e. non-cancellable).
This is definitely advantageous for the policyholder. However, from a direct writers or a
reinsurers perspective, it represents an additional risk requiring higher premiums.
Secondly, similar to the early stages of CI insurance in the UK, the CI definitions in
Canada have not yet been standardized. Naturally, the current CI definitions in an insurance contract have become a point of differentiation from one carrier to another. Market
pressures have resulted in some companies increasing their benefits and softening their
definitions. From a marketing standpoint, a CI policy with softer definitions creates an
advantage at the point of sale. Unfortunately, at the time of a claim this could become a
contentious issue and ultimately lead to policyholder dissatisfaction. The reason is that a
softer definition usually brings about an element of subjectivity, which makes it difficult
for the claims department to interpret the definition as intended. This contradicts the
philosophy of CI insurance, which tries to be as objective as possible.
Insurers are beginning to realize that CI insurance is a living benefit and policyholders
put a great deal of importance on value-added services at the time of a claim. Therefore,
some insurers are considering not only paying a lump-sum benefit, but also offering services at the time of a claim such as:
independent physician/specialist evaluation;

referral to the most appropriate specialist given the claimants condition;
coordination of treatment in the Canadian healthcare system;
if the claimant chooses to be treated outside Canada, the insurer will help with travel
arrangements, accommodation and payment guarantees.
Typically, these services will be managed and administered by a third party specializing in
the medical field. It is still too early to say whether potential CI insurance consumers
value these services at the time of a claim. However, initial signs are encouraging.
Experience
To date, there is no recognized experience analysis for this product in Canada.
41
10
AUSTRALIA
Developments
In Australia, most life insurances are written on a yearly renewable term basis. This also
applies to the so-called trauma cover, the common name of the CI cover in Australia.
More than 95% of the CI policies are temporary insurances where the premium may be
reviewed.
The CI premium proportion has been rising constantly in the last few years and amounted to 14% of the overall life premium income in 1997. In the same year, the new business
premium was already 15%, the majority being prepayment riders on term insurances.
Stand-alone covers have meanwhile been introduced, but their sales success is relatively
small.
Insurers have succeeded in introducing a waiting period in the Australian market, but the
desired aims have not been achieved (see Experience). Currently, an extension of the
waiting period to four or five months, especially for cancer, is under discussion.
Two companies have extended their terms and conditions and are now allowed to
exclude certain illnesses altogether if adequate medical progress has been made, or to
change their definitions. However, policyholders must be advised three months prior to
the effectiveness of such a change. This applies exclusively to policies with a premium
guarantee.
All in all, the CI development in Australia is towards more and more illnesses being
included. Under certain policies, up to 32 illnesses may now be insured. Even loss of
independent existence and covers for children are being offered.
Experience
In its Report on the Mortality Investigation 19951997, the Institute of Actuaries of
Australia has analysed the market experience with the CI cover (trauma cover). In this
period, a total of 626 claims were accepted with an overall exposure (lives exposed to
risk) of about 367,000.
42
Claims experience 1995 to 1997:

Males
Age band
Females
Claims
Exposure
29
108
137
33
4,247
58,739
93,729
45,150
3,646
1724
2534
3544
4554
5564
Rate in
0.00
0.49
1.15
3.03
9.05
Claims
Exposure
Rate in
1
37
92
83
5
4,783
59,541
73,045
23,227
1,226
0.21
0.62
1.26
3.57
4.08
Causes of claim: Cancer is by far the most important cause of claim in Australia (61% of
all claims 46% for males and 84% for females). Heart attack and bypass surgery amount
to significant percentages only with males (17% and 10%). The proportion of illnesses
apart from the four standard ones (cancer, heart attack, bypass surgery and stroke) is relatively large (16% of all claims 20% for males and 10% for females).
Male
Female
17%
1% 4%
46%
1%
10%
7%
10%
84%
20%
Cancer
Cancer
Heart attack
Heart attack
Stroke
Stroke
Bypass
Bypass
Others
Others
Smokers/non-smokers: Whereas many policies with durations of more than five years
were calculated with aggregate premiums (around 25% of policies older than five years),
nearly all the new products differentiate between smokers and non-smokers (only 0.3%
are on an aggregate basis), the majority of policies in force being non-smoker ones (more
than 85%).
An investigation of the higher risk of smokers as compared to non-smokers has been
conducted, but it is not very reliable, owing to the small number of claims and the low
exposure of smoker products.
Selection: In the first policy year, the claims ratio with males is better than in policy years
2 to 5. However, the risk covered in the first policy year is smaller in Australia, due to a
waiting period of three months on average. For the second policy year, no selection effect
is visible. This means that if the waiting period is considered in the analysis, no selection
effect at all is noticeable.
43
With females, the claims ratio in the first and second policy years is even higher than in
subsequent ones. The assumption that antiselection considerably affects the claims frequency is supported by this investigation. The market confirms that for breast cancer
(females) and heart disease (males) in particular there are substantially more early claims
than expected. Many of them are filed after four or five months, i.e. shortly after the end
of the waiting period.
Sum insured: An investigation of claims according to sums insured reveals far lower loss
ratios. This suggests that there are far more claims under policies without medical underwriting than under those with medical underwriting. Unfortunately this item has not been
analysed.
44
11
SOUTHEAST ASIA
Developments
Although Southeast Asia is not a single market, there are many common features of CI
business in this region which merit closer inspection. The following observations stem
mainly from Malaysia, Singapore, Hong Kong and Taiwan.
The first CI covers were offered in the late 1980s and insurers soon noticed that CI was a
useful addition to life insurance and had considerable market potential.
By the mid-1990s, virtually all companies that offer CI covers today had already launched
their first products on the market. Besides life insurers, a number of health insurers now
also offer CI as a supplement to their products. Since 1996, over a million new policies
have been sold in this region every year mostly in Malaysia, Singapore, Hong Kong
and Taiwan.
A major marketing aspect in this region is the number of diseases companies cover. In
Hong Kong, Singapore and Malaysia policies usually cover between 30 and 36 diseases.
In total, more than 50 different conditions are already offered as benefit triggers. An
exception to this is Taiwan, where the supervisory authorities have so far only approved
seven diseases.
In addition to covering diseases that are especially prevalent in this region (encephalitis,
meningitis), many policies also provide cover against loss of independent existence and
terminal illness. Just like TPD in the UK, these two benefit triggers are designed to cover
diseases not expressly listed in the policy conditions, and thus provide an ideal complement to the product.
One special feature is the inclusion of TI in stand-alone products. In these cases, TI provides an additional benefit for many causes of death not covered under the other CIs.
This contradicts the original concept of TI cover, which only makes advance payments for
subsequent benefits. A considerable part of the premium therefore has to be calculated
for this additional benefit (see Chapter 2).
Increasingly, covers are being offered which provide only partial benefit of 1020% for
certain benefit triggers. This system is frequently used for minor surgery such as angioplasty (see Scaled benefits, Chapter 7 South Africa). Benefits for children and juveniles,
45
which are often included automatically in the policies, also only provide reduced cover.
However, these benefits are granted separately and do not reduce the benefit of the
parents under whose cover the children are insured.
Another feature, especially in Hong Kong, are products for target groups. The most common of these covers are the so-called Lady Plans, which are specially designed for young
women who are starting a family. They offer covers available only as a package (see
below) and others with the option of individual components.
They basically include a combination of the following insurance elements:
Life cover
Prepayment CIC
Coverage of specific female illnesses
Maternity benefits
Complications during pregnancy
Coverage for congenital abnormalities of the children
Health insurance benefits
Hospital benefits
Although CI is only a part of this package, it is the inclusion of certain diseases (e.g.
systemic lupus erythematosus) that makes the product particularly attractive for women.
The proportion of prepayment covers in this region is well over 80%, although life and CI
covers are often combined under one policy. CI is therefore not an optional rider and can
be acquired only in combination with a main policy.
The premiums for CI policies are predominantly guaranteed and cannot be adjusted during the policy term. This seems especially risky for policies with an age at maturity of
over 80 years, as the derivation of incidence rates for such old ages is not very reliable.
As nearly all policies are currently in the age range below 55 years, only time will tell
whether the rates are set at an appropriate level or not.
Experience
The Life Insurance Association of the Republic of China conducted the Dread Disease
Experience Study 1996. It exclusively considers the Taiwanese experience of 1996,
the exposure being 2.4 million policy years and 2,108 claims paid. The sum insured at
risk amounted to TW$ 1,240bn.
The following overall claims rates (policies) were observed:
Males
Age band
2024
2529
3034
3539
4044
4549
5054
5559
6064
46
Females
Claims
Exposure
Rate in
42
82
95
146
215
160
99
44
8
156,811
234,588
228,045
184,567
127,903
67,257
23,907
8,349
1,531
0.27
0.35
0.42
0.79
1.68
2.38
4.14
5.27
5.23
Claims
48
82
162
219
274
220
100
53
12
Exposure
Rate in
203,994
239,071
208,924
168,310
120,126
71,032
29,404
11,764
2,085
0.24
0.34
0.78
1.30
2.28
3.10
3.40
4.51
5.76
Causes of CI: In contrast to all the other investigations mentioned, this study shows that
cancer also predominates for males (77%) as in other Asian markets. Heart attack and
renal failure, however, only play a small part (7% each).
For females, this effect is even more pronounced: 89% of claims are for cancer. The
second most frequent CI cause is renal failure (7%). Heart attacks account for only 4%
of claims.
Male
Female
7%
1% 2%
7%
4%
1%
7%
5%
77%
89%
Cancer
Cancer
Heart attack
Heart attack
Stroke
Stroke
Renal failure
Renal failure
Others
Others
Medical/non-medical: The experience over all ages is worse under policies with medical
underwriting than without. However, the main reason for this is that the non-medical policies are two years younger on average. If the results of five-year age bands are compared,
no clear statement is possible.
Sum insured: If claims and policies are evaluated according to sums insured and not to
policy years, the claims rate is 5 to 10% lower, the only exception being main policies for
females with medical underwriting. For females, it is apparently impossible to assess
policies with large sums insured carefully enough by means of medical underwriting.
Main policies/riders: The number of rider contracts exposed to the CI risk is smaller than
the total exposure of the main policies. Thus, a claims analysis of the rider contracts generates less reliable statistical results than an analysis of the large number of main policies. However, it can be observed, that the claims rate of riders is significantly lower than
the claims rate for main policies.
Males
Claims
Main policy
Rider
736
185
Females
Exposure (policies)
935,563
292,806
Claims
949
238
Exposure (policies)
203,994
304,644
The crude claims rate of riders is only 0.708, whereas the crude claims rate of main policies is 0.915. The lower claims rates of riders compared to those of main policies can
even be demonstrated for most age bands.
47
Final remarks
This publication clearly demonstrates the wide and varied nature of CI insurance. The
design and launch of a CI product is complementary to the sale of life insurance products,
and in fact, because of its flexibility, a CI cover may make a companys regular life insurance products more attractive.
CI insurances grant survival benefits, involving rather complex definitions of what actually
constitutes an insured event. This complexity not usually found in traditional life insurance gives rise to additional risks that need to be given careful consideration in CI insurance.
As one of the worlds leading reinsurers, Munich Re has a wide range of experience in
this field and is thus able to offer its clients expert assistance in the following areas
1 PRODUCT DEVELOPMENT
A CI product will only be successful if it meets the individual requirements of its target
market and fits in with the business structure of the life insurers selling the product.
Munich Res experts are on hand to offer support with
product design,
selection and definition of diseases,
insurance terms and conditions,
actuarial bases,
profitability analyses,
development of next-generation products.
2 MARKETING
CI products usually present a challenge to marketing departments. First and foremost, the
majority of people do not like to think about the possibility of serious illnesses. Also, the
concept of cover for a CI product may be more difficult to convey than for a conventional
life insurance. Munich Re has therefore devoted an entire brochure to this subject area,
entitled: The Marketing of Critical Illness.
Munich Res service covers areas such as
48
product positioning,
target group analysis,
suitable sales channels,
advertising material.
3 RISK ASSESSMENT
Risk assessment for CI insurances is more technically demanding than with traditional
life insurances. With CI, risk assessment is rather concerned with assessing the risk of
morbidity than determining extramortality. Consequently, Munich Re has developed an
underwriting manual, based on state-of-the-art medical knowledge, designed to help
underwriters perform efficient risk assessment.
In addition, Munich Re provides advice and assistance with
application forms,
setting medical examination limits,
assessment of substandard risks,
financial underwriting,
and conducts seminars/workshops for medical underwriters.
4 CLAIMS SETTLEMENT
This subject is covered separately within Munich Res publication Claims Life and
ancillary benefits. Munich Res services include the design of questionnaires on claims
handling and support in the settlement of difficult CI cases. Munich Re also offers its
clients claims seminars and conducts claims audits.
5 PORTFOLIO ANALYSES
Munich Re offers a portfolio-analysis service for its clients, although it should be added
that a sufficiently large statistical basis is needed to achieve meaningful results. Munich
Re regards an aggregate portfolio of 50,000 policy years as a minimum requirement for
such a portfolio analysis.
6 REINSURANCE
For good reasons life insurers tend to reinsure CI business to a larger extent than conventional life business. Munich Re recommends its clients quota share reinsurance, which
should be accompanied by surplus reinsurance to cover higher-than-average sums
insured.
Munich Re would be pleased to provide its clients with its full range of services, including
the supply of a reinsurance capacity, which is tailored to the clients individual requirements.
49
The concept of critical illness insurance
References and
sources
The marketing of critical illness insurance, 2000, Munich Re, Munich
Claims Life and ancillary benefits, 2000, Munich Re, Munich
Dread Disease Underwriting Manual, 1994, Munich Re, Munich
Dread Disease Cover An Actuarial Perspective, Dash & Grimshaw;
Staple Inn Actuarial Society, 1990
Dread Disease Insurance, 1989, Munich Re, Munich
Critical Illness Cover A Time For Review, Presented to the Staple Inn Actuarial Society
by P. Mannion & M. Werth (Munich Re UK)
Cancer Statistics Registrations, Office for National Statistics, England and Wales, Series
MB1 No. 25
Continuous Mortality Investigation Reports No. 9, Institute of Actuaries and Faculty of
Actuaries, UK 1988
Mortality Statistics: Cause, Office for National Statistics, England and Wales, Series DH2
No. 23
South Africa Dread Disease Investigation, Continuous Statistical Investigations
Committee Actuarial Society of South Africa, 1997
A Critical Review, Report of the CI Healthcare Study Group;
Staple Inn Actuarial Society, 2000
Statement of Best Practice for Critical Illness Cover, 1999, Association of British
Insurers
Report on the Mortality Investigation 19951997, The Institute of Actuaries of Australia,
1999 (Appendix A.10 - A.12)
Dread Disease Experience Study 1996, The Life Insurance Association of the Republic of
China
50
APPENDICES
51
APPENDIX 1
SPECIMEN DEFINITIONS OF THE ELEVEN MOST FREQUENTLY COVERED CIs
Cancer
A disease manifested by the presence of a malignant tumour characterized by the uncontrolled growth and spread of malignant cells, and the invasion of tissue. The term cancer
also includes leukaemia and malignant disease of the lymphatic system such as
Hodgkins Disease. Any non-invasive cancer in-situ, Hodgkins Disease stage I, prostate
cancer stage A, all skin cancers except invasive malignant melanoma (starting with Clark
Level III) and any malignant tumour in the presence of any Human Immunodeficiency
Virus are excluded.
Heart attack (myocardial infarction)
The death of a portion of the heart muscle as a result of inadequate blood supply to the
relevant area.
c) elevation of infarction specific enzymes
Non-ST segment elevation myocardial infarction (NSTEMI) with elevation of troponin I or
T is excluded.
Stroke
Any cerebrovascular incident producing neurological sequelae lasting more than 24 hours
and including infarction of brain tissue, haemorrhage and embolization from an extracranial source. Evidence of neurological deficit for at least 3 months has to be produced.
Coronary artery (bypass) surgery
The actual undergoing of open chest surgery for the correction of two or more coronary
arteries, which are narrowed or blocked, by coronary artery bypass graft (CABG). The surgery must have been proven to be necessary by means of coronary angiography. With
regard to this cover, angioplasty and/or any other intra-arterial procedures are excluded.
Kidney failure (end-stage renal disease)
End-stage renal disease presented as chronic irreversible failure of both kidneys to function, as a result of which either regular renal dialysis (hemodialysis or peritoneal dialysis)
is instituted or renal transplantation is carried out.
Major organ transplantation
The actual undergoing of a transplantation as the recipient of a heart, lung, liver, pancreas, kidney or bone marrow.
Paralysis
Total and irreversible loss of use of two or more limbs through paralysis due to accident
or sickness. These conditions have to be medically documented for at least three months.
52
Blindness (loss of sight)

Total, permanent and irreversible loss of all sight in both eyes.
Multiple sclerosis
Unequivocal diagnosis of multiple sclerosis by a consultant neurologist holding such an
appointment at an approved hospital. The insured must exhibit neurological abnormalities that have existed for a continuous period of at least six months or must have had at
least two clinically documented episodes. This must be evidenced by the typical symptoms of demyelination and impairment of motor and sensory functions.
Heart valve replacement
Surgical replacement of one or more heart valves with prosthetic valves. This includes
the replacement of aortic, mitral, pulmonary or tricuspid valves with prosthetic valves due
to stenosis or incompetence or a combination of these factors. Heart valve repair, valvulotomy and valvuloplasty are excluded.
Surgery of aorta
The actual undergoing of surgery for a disease of the aorta needing excision and surgical
replacement of the diseased aorta with a graft. For the purpose of this definition aorta
shall mean the thoracic and abdominal aorta but not its branches. Traumatic injury of the
aorta is excluded.
53
APPENDIX 2
DERIVING INCIDENCE RATES
The steps mentioned in Chapter 2 for deducing the incidence probabilities are described
below in detail, taking the cancer incidence rates for a stand-alone rider in the UK as an
example.
Population rates
The following source is a suitable database:
Cancer statistics registrations (CSR), England and Wales,
Office for National Statistics, Series MB1 No. 25
These rates consider age-dependent statistics up to 1992. More recent data are contained
in the Monitor of the Office for National Statistics, enabling estimates of the incidences
of the last few years.
Rates per 100,000 population of newly diagnosed cases of cancer:
England and Wales
Male
All malignant neoplasms (ICD 140208) excluding ICD 173 (malignant skin cancer)
Age
1990
1991
1992
2024
2529
3034
3539
4044
4549
5054
5559
6064
25.6
36.0
43.2
63.6
102.0
177.5
326.8
562.5
982.0
26.1
33.9
43.6
65.5
99.3
178.3
323.8
552.9
959.0
25.3
36.5
48.1
63.3
108.1
180.8
343.1
565.7
963.9
All ages
416.4
418.4
435.6
1993
1994
1995
1996
1997
424.9*
418.8*
414.3*
406.7*
402.4*
* Estimated
England and Wales

Female
Age
1990
1991
1992
2024
2529
3034
3539
4044
4549
5054
5559
6064
22.9
41.3
79.0
134.5
212.9
328.2
470.5
645.1
896.2
24.1
40.6
77.3
131.3
216.1
332.7
492.9
662.4
885.8
24.1
42.3
79.2
136.2
221.5
346.5
511.9
663.8
906.7
All ages
407.2
414.0
428.8
* Estimated
54
All malignant neoplasms (ICD 140208) excluding ICD 173 (malignant skin cancer)
1993
1994
1995
1996
1997
406.7*
405.9*
404.9*
402.6*
400.5*
Incidence rates in accordance with the Munich Re specimen definition for cancer will
then result directly. The data is available in five-year age bands, broken down by sex and
type of cancer. CI actuarial bases can be deduced from the column All malignant neoplasms excluding 173 as cancer type 173 (according to ICD 9 Code) Other malignant
neoplasm of skin is excluded under the cancer definition.
First-ever adjustment
The CSR data only include newly diagnosed cancers. This means that double counting is
excluded. A first-ever adjustment is therefore unnecessary.
Overlap of conditions
The critical illness cancer overlaps other CIs only insignificantly. According to US studies,
for example, 0 to 10% of all cases of kidney failure are preceded by cancer. As, however,
cancer is the CI covered most often, these slight overlaps are usually considered when
calculating the incidence rates of the other CIs.
Adjustment for insured portfolio
Statistics on the better risk of insureds for various illnesses as compared to the normal
population are not yet generally available. An indication is given by
A Critical Review,
Report of the Critical Illness Healthcare Study Group, UK, 2000
dealing, in Section 7, with the differences in population numbers and incidences
observed in CI portfolios. These results, however, should not be used unaltered, also
because the portfolio used for the study is in the selection phase. This is why actuaries
often rely on the evidenced mortality differences which may then be transferred to the
CI incidence rates.
In CMIR-9
Continuous Mortality Investigation Reports No. 9,
Institute of Actuaries and Faculty of Actuaries, UK, 1988,
deaths according to causes in private insurance are compared with the population study
Mortality Statistics: Cause, England and Wales. Selection discounts can be deduced.
However, it appears unjustified to decrease the population incidences strongly on account
of the markedly higher antiselection under CI covers as compared to death covers. For
females, a discount is hardly acceptable considering the higher antiselection risk of typical types of cancer (e.g. breast cancer).
Mortality during the survival period
Cancers are usually not so acute that patients die within a few days after the diagnosis.
This is why the mortality during the survival period here can be neglected when deducing
incidence rates.
55
Smokers/non-smokers
Various sources mention the types of cancer influenced by smoking habits. In addition,
they indicate the portion directly attributable to smoking.
Thus, a cancer rate can be deduced that is caused by smoking only. It must be considered, however, that former smokers and passive smokers are also included in this
rate.
The clear differences in the risk run by smokers and non-smokers will be shown on the
basis of specimen incidence rates at the end of this section.
Trend
The CSR data shows a decreasing trend in the years from 1992 to 1997 (the 1992 rates are
about 8% higher than those for 1997). When deciding whether or not this trend should be
included in the calculation, you should consider that several signs indicate that the cancer
risk in England and Wales is somewhat higher in reality, owing to the fact that screening
examinations are not common. For example, a comparison between the cancer rates in
England/Wales and the USA shows that breast cancer rates in England are far below the
US rates (England and Wales/USA = 1/1.24 in the age bracket 4549). However, in the age
bracket 5559, where screening examinations are increasingly conducted in England, the
difference is only 5%. The situation is even clearer with prostate cancer: In the USA, there
are markedly more cases per 100,000 inhabitants than in England and Wales (England
and Wales/USA = 1/5.80 in the age bracket 5054).
Mortality after CI
If considerations are based on a prepayment product, one additionally needs the
factors kx mentioned under Mortality after critical illness.
A model database to deduce these values is provided in
Mortality Statistics: Cause, England and Wales 1996,
Office for National Statistics, Series DH2 No. 23
These statistics show mortality rates from England and Wales for various causes of death
and age bands from which the following factors can be calculated for cancer:
For all malignant neoplasms excluding ICD 173
56
Age
2024
2529
3034
3539
4044
4549
5054
5559
6064
kx (males)
ky (females)
7.5%
19.3%
9.3%
20.2%
10.5%
31.2%
16.2%
43.6%
23.4%
49.3%
29.2%
54.8%
33.9%
56.9%
37.0%
52.9%
37.2%
45.7%
Results
Ignoring the adjustment for an insured portfolio (which may differ from one company to
the other) and any additionally required safety loadings, the following incidence rates
result (in of the CI sum insured):
Stand-alone rider
Non-smokers
Age
2024
2529
3034
3539
4044
4549
5054
5559
6064
m
0.25
0.35
0.45
0.57
0.90
1.42
2.59
4.21
7.11
Smokers
0.23
0.41
0.76
1.31
2.10
3.26
4.75
6.05
7.98
0.27
0.40
0.55
0.80
1.55
2.82
5.59
9.38
16.14
0.26
0.47
0.87
1.52
2.53
4.04
6.17
8.31
12.16
Based on the ELT15 population figures for qx the following incidence rates result for prepayment in of the CI sum insured (as above, ignoring the adjustment for an insured
portfolio and any additionally required safety loadings and ignoring the risk premium
rates due for the death risk):
Prepayment/acceleration rider
Non-smokers
Age
2024
2529
3034
3539
4044
4549
5054
5559
6064
m
0.18
0.27
0.36
0.37
0.51
0.66
1.11
1.47
2.31
Smokers
0.17
0.34
0.61
0.96
1.50
2.13
2.86
3.20
3.90
0.20
0.32
0.43
0.52
0.87
1.31
2.40
3.28
5.25
0.19
0.39
0.69
1.12
1.80
2.64
3.72
4.39
5.94
57
APPENDIX 3
SAMPLE CRUDE INCIDENCE RATES
Incidence rates in for smokers/non-smokers portfolio, calculated for the health situation
in UK, survival period one month.
For a CI product covering the five core diseases:
Cancer, myocardial infarction, stroke, coronary artery surgery, renal failure.
Stand-alone rider
Age
20
25
30
35
40
45
50
55
60
65
Male
0.24
0.36
0.51
0.82
1.52
2.80
5.05
8.62
13.69
20.35
Acceleration rider
Female
Age
0.25
0.36
0.62
1.17
2.01
3.22
4.94
7.34
10.40
14.14
20
25
30
35
40
45
50
55
60
65
Male
0.18
0.28
0.39
0.63
1.12
2.03
3.49
5.73
8.56
11.19
Female
0.19
0.28
0.47
0.89
1.49
2.33
3.41
4.88
6.50
7.77
(Rates per 1,000)
For a CI product covering the 11 diseases Munich Res CI underwriting manual is based
on:
Cancer, myocardial infarction, stroke, coronary artery surgery, renal failure,
major organ transplant, paralysis, blindness, heart valve replacement,
surgery for a disease of the aorta, multiple sclerosis.
Stand-alone rider
Age
20
25
30
35
40
45
50
55
60
65
Male
0.33
0.50
0.72
1.06
1.78
3.12
5.48
9.31
14.75
21.79
(Rates per 1,000)
58
Acceleration rider
Female
Age
0.32
0.48
0.80
1.38
2.25
3.49
5.27
7.82
11.08
14.98
20
25
30
35
40
45
50
55
60
65
Male
0.26
0.40
0.57
0.83
1.34
2.29
3.81
6.24
9.30
12.07
Female
0.26
0.38
0.63
1.07
1.69
2.55
3.67
5.25
7.00
8.33
APPENDIX 4
SAMPLE NET PREMIUM RATES
STAND-ALONE RIDER
Based on the incidence rates ix from Appendix 3 the net level premiums for a CI standalone rider are calculated by using the formula
1000
aa
Naa
x Nx+n
P x,n| =
with
n-1
aa i
Dx+j
x+j v
7
12
j=0
with
1
v = 1+i
discounting factor
aa = Iaa (1 qaa i )
I x+1
x
x
x
active lives
aa
x
Daa
x = Ix v
discounted active lives
Naa
x =
D
j
aa
x+j
sum of discounted active lives
Stand-alone rider
5 covered CIs: Cancer, myocardial infarction, stroke, coronary artery surgery, renal failure
Males
Duration
Age
20
25
30
35
40
45
50
55
10
15
20
25
30
35
40
45
0.28
0.41
0.60
1.04
1.93
3.52
6.20
10.25
0.34
0.50
0.80
1.45
2.65
4.73
8.01
12.66
0.41
0.65
1.12
2.02
3.63
6.21
9.99
0.53
0.90
1.58
2.81
4.83
7.84
0.73
1.27
2.22
3.79
6.17
1.03
1.78
3.02
4.89
1.46
2.44
3.92
2.00
3.19
2.62
(Rates per 1,000)
Stand-alone rider
Females
Duration
Age
20
25
30
35
40
45
50
55
10
15
20
25
30
35
40
45
0.29
0.43
0.79
1.45
2.40
3.77
5.71
8.32
0.35
0.60
1.09
1.89
3.03
4.65
6.89
9.76
0.48
0.84
1.46
2.41
3.77
5.65
8.12
0.67
1.14
1.91
3.04
4.61
6.70
0.91
1.51
2.43
3.75
5.50
1.22
1.95
3.03
4.50
1.59
2.46
3.67
2.02
3.00
2.47
(Rates per 1,000)
Premiums are calculated using an interest rate of 3% and the mortality

AM/AF 80 ult.
59

ACCELERATION RIDER TO TERM INSURANCE
The net level premiums for a CI acceleration rider are calculated by using the formula
with
1000
aa
Naa
x Nx+n
P x,n| =
n-1
aa i
Dx+j
x+j v
7
12
(1
|)
j+1Vx,n
j=0
with
|
jVx,n
reserve of the basic policy effected with age x

and duration n at the end of the jth policy year.
Acceleration rider to term insurance

Males
Duration
Age
20
25
30
35
40
45
50
55
10
15
20
25
30
35
40
45
0.21
0.31
0.46
0.78
1.42
2.48
4.21
6.67
0.26
0.38
0.61
1.07
1.91
3.26
5.29
7.81
0.32
0.49
0.84
1.47
2.53
4.15
6.28
0.41
0.67
1.15
1.97
3.26
4.98
0.55
0.93
1.56
2.57
3.95
0.76
1.26
2.05
3.14
1.03
1.67
2.52
1.37
2.06
1.69
(Rates per 1,000)
Acceleration rider to term insurance

Females
Duration
Age
20
25
30
35
40
45
50
55
10
15
20
25
30
35
40
45
0.22
0.33
0.61
1.09
1.78
2.66
3.88
5.42
0.27
0.46
0.83
1.40
2.18
3.21
4.57
6.05
0.37
0.64
1.10
1.76
2.65
3.80
5.16
0.51
0.86
1.40
2.15
3.15
4.33
0.69
1.11
1.74
2.58
3.60
0.90
1.40
2.10
2.97
1.14
1.71
2.44
1.41
2.00
1.65
(Rates per 1,000)
60

ACCELERATION RIDER TO ENDOWMENT INSURANCE
Acceleration rider to endowment
Males
Duration
Age
20
25
30
35
40
45
50
55
10
15
20
25
30
35
40
45
0.08
0.12
0.18
0.29
0.54
0.95
1.64
2.67
0.11
0.17
0.25
0.43
0.78
1.37
2.32
3.65
0.14
0.21
0.34
0.59
1.05
1.81
2.97
0.17
0.27
0.45
0.79
1.39
2.31
0.22
0.36
0.61
1.05
1.78
0.29
0.48
0.81
1.36
0.39
0.64
1.06
0.52
0.84
0.68
(Rates per 1,000)
Acceleration rider to endowment

Females
Duration
Age
20
25
30
35
40
45
50
55
10
15
20
25
30
35
40
45
0.09
0.13
0.23
0.42
0.69
1.05
1.54
2.20
0.12
0.18
0.34
0.59
0.95
1.42
2.07
2.87
0.15
0.25
0.45
0.76
1.19
1.77
2.52
0.20
0.34
0.59
0.96
1.46
2.13
0.27
0.45
0.75
1.18
1.76
0.35
0.58
0.93
1.43
0.46
0.73
1.14
0.58
0.90
0.73
(Rates per 1,000)
Premiums are calculated using an interest rate of 3% and the mortality

AM/AF 80 ult.
61
APPENDIX 5
CRITICAL ILLNESS BENEFIT SPECIMEN POLICY CONDITIONS
1 Event on which the benefit becomes payable
This benefit shall, subject to the special conditions below, become payable if it has been
diagnosed that during the period of cover of this benefit, the life insured has suffered
from or developed one of the critical illness conditions defined in Clause 2 below.
2 Definitions
Period of cover of this benefit shall mean the period as from the commencement date
of this benefit until the expiry date specified in Clause 4 below. Critical illness condition
shall mean the life insured having suffered from or developed one of the following critical
illnesses during the period of cover of this benefit
here the covered CIs should be listed
Critical illness definitions

here the full definitions of the covered CIs should be listed
3 Amount of benefit payable

In the case of prepayment products
a)
Lump-sum payment of the sum insured under this benefit, premium payment for
this benefit will cease.
b)
The life sum insured under the policy, payable in case of death (or maturity),
shall be reduced by the critical illness benefit paid out. The premium payable for
the policy shall be reduced in the same proportion.
4 Alternatively
In the case of stand-alone products
a)
b)
Lump-sum payment of the sum insured under this benefit as soon as the insured
has survived for here the survival period should be stated after a diagnosis of
the critical illness conditions defined under Clause 2 above. Premium payment
for this benefit shall cease.
(If the CI cover is a rider attached to a main policy:) The premium payable for the
main policy shall continue unchanged after the CI payment.
No benefit shall be paid if the insured dies within here the survival period
should be stated after occurrence of the CI.
4 Expiry of this benefit

This benefit shall expire at the earliest upon
a) lapse, surrender of the policy, conversion of the policy into a paid-up insurance; or
b) the benefit expiry date shown in the schedule; or
c) the date of the first occurrence of the event on which this benefit becomes payable.
62
5 Notice of claim
Written advice of any claim under this benefit must be given to the company at its Head
Office as soon as practicable after the insured suffers from or develops a critical illness
condition and, in any event, within three months of any such occurrence.
6 Proofs
No amount of benefit payable under this benefit shall become payable until the insured
has provided proof to the satisfaction of the company of
a) the age of the life insured; and
b) the occurrence of the relevant critical illness condition, proof of which shall include a
diagnosis confirmed by a registered medical practitioner appointed by the company
and supported by acceptable clinical, radiological, histological and laboratory evidence.
Prior to any payment under this benefit being made, proof of the right of the insured to
the proceeds of this benefit shall be given to the company.
7 Exclusions
No amount shall be payable under this benefit if the relevant critical illness condition was
caused directly or indirectly by
a) attempted suicide or intentional self-inflicted injury by the life insured,
b) addiction to alcohol or drugs,
c) diseases in the presence of an HIV infection.
No amount shall be payable under this benefit in respect of a critical illness condition
diagnosed within a period of here the waiting period should be stated after the commencement date of the policy.
8 Premium
The Company reserves the right to adjust the premium payable for this benefit as from
the next anniversary date of the policy by giving three months advance notice in writing.
63
APPENDIX 6
CHECKLIST FOR THE APPLICATION FORM
Please check whether you are able to obtain answers to the following questions from
your present application form.
General questions with regard to the CI cover
Clear product details, i. e. what type of critical illness cover has been requested.
Occupation (incl. duties/activities)?
Name and address of the applicants medical consultant?
Question about previous cover? The applicant should be asked to comment on any
previous critical illness as well as sickness cover or any simultaneous applications.
Are the covered conditions clearly named in the application form? For instance, have
you ever had a myocardial infarction?
Family history of the applicant
Has anybody in the applicants family (mother, father, siblings) ever suffered from heart
or cardiovascular disease, stroke, cancer, diabetes mellitus, kidney disease, mental illness, alcoholism, Huntingtons chorea, multiple sclerosis, motor neurone disease,
Alzheimers disease, hypertension, hyperlipidemia, epilepsy or any other hereditary
disease? If yes, try to obtain age at onset, condition and, if applicable, age at death.
Lifestyle of the applicant
Smoking: If yes, do you ask about the number of cigarettes a day/since when?
Alcohol: If yes, do you ask about the daily alcohol intake/since when?
Drugs: If yes, do you ask about the type of drug/since when?
Dangerous leisure activities (e.g. aviation or motor racing)?
Medical history of the applicant
Height/weight
Blood pressure
Indication of previous or future hospitalization/operations, indications of special examinations or medical treatment at present or in the past? Were there any pathological
results (e.g. blood tests, ECGs, X-rays, endoscopy, etc.)?
Has the applicant ever been diagnosed positive for HIV infection or ever suffered a
sexually transmitted disease?
Has the applicant ever received treatment with blood products or undergone a blood
transfusion?
Does or did the applicant ever suffer from heart or cardiovascular disease, stroke, cancer, diabetes mellitus, hypertension, hyperlipidemia, kidney disease, mental illness,
alcoholism, Huntingtons chorea, multiple sclerosis, motor neurone disease, Alzheimers
disease, epilepsy or any other hereditary disease? Did he/she ever have to undergo an
organ transplantation? Does or did he/she ever suffer from disorders of the eyes or
ears?
64
APPENDIX 7
SPECIMEN CLAIMANTS STATEMENT
Name
Policy number
Address
Home telephone number
Business telephone number
Occupation at the onset of your illness
Please describe the regular duties/activities of your job
Please give full details of the extent and nature of your current illness
Date on which you first consulted a doctor for this illness
Have you previously suffered from or received treatment for a related illness?
Yes
No
If yes, give complete details
Please give details of the treatment you have received including details and dates of any
hospital examinations or in-patient treatment
Have any of your blood relatives suffered from a similar or related illness?
65
If yes, state degree of relationship, nature of illness and the date when such illness was
initially diagnosed
Do you smoke cigarettes?
Yes
No
If yes, what is your daily consumption and how long have you been smoking?
If no, have you ever smoked?
Yes
No
If yes, what was your daily consumption and when did you quit smoking?
Please give names, addresses and telephone numbers of all physicians who have treated
you, and of all hospitals at which you have been treated for this illness (include dates
attended):
Name/s
Address/es
Telephone number/s
Please give the name, address and phone number of your family physician
Name/s
Address/es
Telephone number/s
I declare that the information provided on this claim form is true and complete to the best
of my knowledge.
Date
Signature of life insured
If life insured is unable to sign:

Print name of individual completing this form
Signature of individual completing this form
66
APPENDIX 8
SPECIMEN PHYSICIANS STATEMENT CORONARY ARTERY BYPASS GRAFTING
Confidential medical certificate
Full name
Date of birth
Policy number
The above-named is insured with (name of company) against the occurrence of certain
contingent events associated with his/her health. A claim has been submitted in connection with one of the above conditions and, to enable us to assess the claim, we would be
grateful for your cooperation in the completion of this form.
1
Please indicate your diagnosis for this patient:
Are you the patients usual medical attendant?
Yes
No
If yes, please provide copies of your office records, examinations performed

(including ECG tracings, exercise stress tests, enzyme assays, isotope imaging,
coronary and LV angiography), consultation reports and hospitalization summaries for the past two years.
If no, please provide the name and the address of this patients usual medical
attendant:
Is there any record of related illnesses in the patients family history, or any other
related family history?
Please give details of anything in the patients habits, personal medical history
or family history which would have increased the risk or contributed to his/her
condition:
Please give details of the patients habits in relation to cigarette smoking, including, to your knowledge, how many cigarettes the patient has smoked in the past
and currently smokes:
67
Please give the name and address of all consultants, specialists or hospitals to
which your patient has been referred or attended for this condition:
If there is any further information that, in your opinion, will assist our Chief
Medical Officer in assessing this claim, please give details:
Date
Signature
Name (printed)
Address
68
Doctors stamp
APPENDIX 9
ACTUAL FRAUD CASE
This section describes a case of fraud which took place in South Africa and is intended to
serve as an extreme example of what can happen with contracts offering living benefits.
It is clear that such a problem is not restricted to CI, and similar cases may also occur in
disability-related (and to a greater extent medical) contracts.
The people involved in this case were an independent insurance broker, two doctors, and
various spouses and other close family members. All the syndicate members knew one
another well and had all, either at the time of the fraud or in the past, experienced a variety of problems involving alcohol, drugs and money, although this fact only came to
light during the subsequent investigation.
The original plan was to issue a number of relatively small CI policies to the various
members of the syndicate on the basis of fraudulent medical evidence, either in the form
of questionnaires completed by the applicant or examinations carried out by one of the
syndicate doctors. The policies would then lead to early claims for illnesses related to the
poor health of the members which was not disclosed at the application stage.
This objective changed somewhere along the line and the syndicate made a conscious
decision to create claims artificially and back these up with false evidence. The claims
were created in various ways, including, for example, the use of inconclusive evidence of
cancer. These included techniques such as needle aspiration which, when used to supply
evidence for a claim, would result in claims that could be disputed but could not be disproved.
With the onus of proof on the insurance industry, such claims are seldom contested.
Similarly, one of the more direct ways in which claims were manufactured was where an
uninvolved patient was operated on in hospital for a tumour, which was, as per normal
practice, then sent for pathology testing to establish possible malignancy.
It would appear, although this has not yet been proved beyond doubt due to the complicated nature of DNA testing, that not all the tumour was sent for testing. Some of it was
retained by the doctor and, if it was found to be malignant, was subsequently sent to
another laboratory, using one of the syndicate members name as the patient.
With such evidence to corroborate a claim, suspicion would never be raised and this was
indeed true here as many claims were paid out to various people in the syndicate. As
mentioned above, the policies predominantly involved small sums insured and were
spread around numerous companies. This made it very difficult to detect or even establish a link.
The fraud is believed to have been uncovered purely by chance during a telephone call
between a claims underwriter and one of the claimants or even the broker himself.
Although exact details of the discovery are unclear, it is safe to say that it was luck and
not industry-wide policing of critical illness that resulted in detection of this scam.
69
Suspicion was raised during the conversation due to inconsistencies and ambiguities in
the respondents answers to questions posed by the insurer. Subsequent investigations
throughout the industry unearthed a link between a large number of recent claims and a
single intermediary.
This then led to further industry-wide investigations and it was found that claims in
excess of SAR 2m had been paid out or were being considered for payment to members
of the syndicate. Furthermore, all policies had been sold by the same broker and all medicals had been performed by one of the two doctors in the syndicate. At the end of the
day, the true reason for this fraud being unearthed was purely the age-old human problem of greed. Had they behaved more sensibly and cautiously, they could conceivably
have got away with the fraud over many years and nobody would have been any the
wiser.
As is often the case in such scenarios, once the facts of the case were unearthed the syndicate collapsed, and many of the members are now clamouring to be the one to reveal
all in return for immunity. But as is also true in many such situations, it remains to be
seen whether this case will actually reach the courts.
This case study was included to show that while living benefit policies have a profitable
and necessary part to play in many markets, they clearly need to be managed beyond the
usual policy, actuarial and underwriting levels associated with traditional covers. Effective
management requires that all staff and agents, but in particular claims and underwriting
personnel, display the necessary diligence and even an element of investigative methodology in their work.
70
2001
Mnchener Rckversicherungs-Gesellschaft
Central Division: Corporate Communications
Kniginstrasse 107
80802 Mnchen
Germany
Tel.: +49 (0)89/3891-0
Fax: +49 (0)89/399056
http://www.munichre.com
Responsible for content:
Operational Division: Life
Dr. Ulrike Hartwagner
Werner Hohenberger
Dieter Kroll
Karl-Heinz Schaller
Order number 302-02916
Cover photo: Stone/Getty-Images

Trauma Insurance Update PDF

Transféré par

Informations du document

Titre original

Copyright

Formats disponibles

Partager ce document

Partager ou intégrer le document

Options de partage

Avez-vous trouvé ce document utile ?

Ce contenu est-il inapproprié ?

Droits d'auteur :

Formats disponibles

Trauma Insurance Update PDF

Transféré par

Droits d'auteur :

Formats disponibles

CRITICAL ILLNESS INSURANCE

Critical illness insurance

Part I: The product

The concept of CI insurance

Part II: Recent developments and experience in selected markets

References and sources

Critical illness insurance

Furthermore, an illustration of how to derive a sound actuarial premium basis is given

Critical illness insurance

Critical illness insurance

1.2 MARKETING CONSIDERATIONS

Critical illness insurance

1.3 PRODUCT DESIGN

1.4 POLICY CONDITIONS

Critical illness insurance

1.5 MAXIMUM BENEFIT LEVELS

1.6 AGE LIMITS

Critical illness insurance

Critical illness insurance

Critical illness insurance

Critical illness insurance

Child and juvenile covers

Critical illness insurance

2.2 DISEASES COVERED MEDICAL ASPECTS

Critical illness insurance

c) The following definition is rejected by Munich Re as being inadequate:

2.3 DISEASES COVERED EXTENSION OF COVER

Critical illness insurance

2.4 INSURANCE TERMS AND CONDITIONS

Critical illness insurance

Critical illness insurance

Critical illness insurance

Critical illness insurance

Critical illness insurance

Extra rate of CIACC over the mortality = ix kx qx

Critical illness insurance

APPLICATION IN OTHER MARKETS

DIFFERENT RATES FOR MALES/FEMALES

DIFFERENT RATES FOR SMOKERS/NON-SMOKERS

Critical illness insurance

Critical illness insurance

Critical illness insurance

Minor risk factors

4.3 IMPAIRMENTS TO BE DECLINED

Coronary artery disease

Critical illness insurance

diseases of the hematological system

4.4 UNDERWRITING INFORMATION

Critical illness insurance

Critical illness insurance

Critical illness insurance

Critical illness insurance

Death claim without prior CI claim

Death claim without prior CI claim

Critical illness insurance

The concept of critical illness insurance

Critical illness insurance

Critical illness insurance

Critical illness insurance

Renal failure and stroke

Renal failure and stroke

By means of stricter underwriting and improved definitions, the proportion of benefits

Critical illness insurance